On January 4, 2007, Practical Corp. acquired 100% of the outstanding common shares of Silly Inc. by a share-for-share exchange of its own shares valued at $1,000,000. The balance sheets of both companies just prior to the share exchange are shown below. Silly had patents not shown on the balance sheet, but that had an estimated fair value of $200,000 and an estimated remaining productive life of four years. Silly’s buildings and equipment had an estimated fair value $300,000 in excess of book value, and the deferred charges were assumed to have a fair value of zero. Silly’s building and equipment are being depreciated on the straight-line basis and have a remaining useful life of 10 years. The deferred charges are being amortized over three years.

During 2007, the year following the acquisition, Silly borrowed $100,000 from Practical; $40,000 was repaid and $60,000 is still outstanding at year-end. No interest is being charged on the loan. Through the year, Silly sold goods to Practical totalling $400,000. Silly’s gross margin is 40% of selling price, and its tax rate is 25%. Three-quarters of these goods were resold by Practical to its customers for $450,000. Dividend declarations amounted to $80,000 by Practical and $50,000 by Silly. There were no other intercompany transactions. The year-end 2007 balance sheets and income statements for Practical and Silly are shown below.

Required:

a. How would the income statement and balance sheet for Practical Corp. differ from those shown below if Practical reported its investment in Silly on the equity basis? Show all calculations.

b. Prepare a complete set of consolidated financial statements for Practical Corp.
for 2007.

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Cash Accounts and other receivables Inventories Buildings and equipment Accumulated depreciation Deferred charges Accounts and other payables Bonds payable Future income taxes Common shares Retained earnings Balance Sheets December 31, 2006 Practical 300,000 shares: Silly 150,000 shares. Practical $ 110,000 140,000 110,000 1,500,000 (700,000) $1.160,000 $ 200,000 60,000 600,000 300,000 $1,160,000 Silly $ 85,000 80,000 55,000 800,000 (400,000) 120,000 $740,000 $100,000 200,000 40,000 150,000 250,000 $740,000