Financial statements of Par Corp. and its subsidiary Star Inc. on December 31, Year 12, are shown below:

Note 1: Dividends on preferred shares are two years in arrears.

On this date, Par acquired 1,400 common shares of Star for a cash payment of $232,400.

The fair values of Star's identifiable net assets differed from carrying amounts only with respect to the following:

The plant had an estimated remaining useful life of five years on this date, and the long-term liabilities had a maturity date of December 30, Year 12. Any goodwill is to be tested annually for impairment.

• Both Par and Star make substantial sales to each other at an intercompany selling price that yields the same gross profit as the sales they make to unrelated customers. Intercompany sales in Year 12 were as follows:

Par to Star              $360,000

Star to Par              381,000

• During Year 12, Par billed Star $2,000 per month in management fees. At year-end, Star had paid for all months except for December.

• The January 1, Year 12, inventories of the two companies contained unrealized intercompany profits as follows:

Inventory of Par         $31,000

Inventory of Star        30,000

• The December 31, Year 12, inventories of the two companies contained unrealized intercompany profits as follows:

Inventory of Par                    $52,000

Inventory of Star                   54,000

• On July 1, Year 7, Star sold equipment to Par for $76,000. The equipment had a carrying amount in the records of Star of $56,000 on this date and an estimated remaining useful life of five years.

• Goodwill impairment losses were recorded as follows: Year 7, $83,000; Year 9, $51,570; and Year 12, $20,560.

• Assume a 40% corporate tax rate.

• Par has accounted for its investment in Star by the cost method. 

• All dividends in arrears were paid by December 31, Year 11. 

Required:

(a) Prepare, with all necessary calculations, the following:

(i) Year 12 consolidated retained earnings statement

(ii) Consolidated balance sheet as at December 31, Year 12

(b) How would the return on eq_uity attributable to Par's shareholders for Year 12 change if Star's preferred shares were non-cumulative instead of cumulative?

(c) On January 1, Year 13, Star issued common shares for $100,000 in cash. Because Par did not purchase any of these shares, Par's ownership percentage declined from 70 to 56%. Calculate the gain or loss that would be charged or credited to consolidated shareholders' equity as a result of this transaction.

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BALANCE SHEETS At December 31, Year 12 Par Star $ 2,700 $ 57,000 Cash Accounts receivable 117,000 102,000 Inventories 84,360 65,000 Land 47,000 87,000 Plant and equipment Accumulated depreciation 520,000 870,000 (197,000) (317,000) Investment in Star common shares 232,400 $860,760 $809,700 $ 98,800 $197,000 Accounts payable Accrued liabilities 9,700 13,400 Preferred shares 67,000 Common shares 450,000 180,000 Retained earnings 302,260 $860,760 352,300 $809,700 RETAINED EARNINGS STATEMENTS for the year ended December 31, Year 12 Par Star Balance, January 1 $297,260 $417,300 Net income (loss) 31,000 (28,000) 328,260 389,300 Dividends 26,000 $302,260 37,000 $352,300 Balance, December 31 Other Information On January 1, Year 5, the balance sheet of Star showed the following shareholders' equity: $8 cumulative preferred shares, 500 shares issued $ 67,000 180,000 Common shares, 2,000 shares issued Deficit (Note 1) (97,000) $150,000 Carrying Amount Fair Value Accounts receivable $51,000 $49,000 Inventory 61,000 68,000 Plant 580,000 630,000 Long-term liabilities 332,000 352,000