On December 31, Year 2, Palm Inc. purchased 80% of the outstanding ordinary shares of Storm Company for $350,000. At that date, Storm had ordinary shares of $240,000 and retained earnings of $64,000. In negotiating the purchase price, it was agreed that the assets on Storm's statement of financial position were fairly valued except for plant assets, which had a $44,000 excess of fair value over carrying amount. It was also agreed that Storm had unrecognized intangible assets consisting of trademarks that had an estimated value of $36,000. The plant assets had a remaining useful life of eight years at the acquisition date and the trademarks would be amortized over a 12-year period. Any goodwill arising from this business combination would be tested periodically for impairment. Palm accounts for its investment using the cost method.

Financial statements for Palm and Storm for the year ended December 31, Year 6, were as follows:

Additional Information

• At December 31, Year 6, an impairment test of Storm's goodwill revealed the following:

• An impairment test indicated that the trademarks had a recoverable amount of $14,350. The impairment loss on these assets occurred entirely in Year 6.

• On December 26, Year 6, Palm declared dividends of $40,000, while Storm declared dividends of $24,000.

• Amortization expense is reported in selling expenses, while impairment losses are reported in other expenses.

(a) Prepare consolidated financial statements.

(b) If none of the acquisition differential had been allocated to trademarks at the date of acquisition, how would this affect

(i) The return on total shareholders' equity for Year 6?

(ii) the debt-to-equity ratio at the end of Year 6?

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STATEMENTS OF FINANCIAL POSITION December 31, Year 6 Storm Palm Assets $270,000 350,000 $200,000 Plant assets-net Investment in Storm Other investments 86,000 26,000 14,000 Notes receivable Inventory 140,000 220,000 92,000 Accounts receivable 180,000 Cash 24,000 34,000 $674,000 $962,000 Shareholders' Equity and Liabilities Ordinary shares Retained earnings $540,000 150,000 $240,000 190,000 Notes payable 150,000 120,000 Other current liabilities 14,000 54,000 Accounts payable 108,000 $962,000 70,000 $674,000 INCOME STATEMENTS For the year ended December 31, Year 6 Storm Palm $910,000 $555,000 Sales (658,000) (380,000) Cost of goods sold Gross profit Selling expenses Other expenses 252,000 175,000 (26,000) (156,000) (39,000) (80,000) 6,000 $ 62,000 Interest and dividend income 38,000 $108,000 Profit Fair value less disposal costs based on recent offer from prospective purchaser $50,000 Value in use based on undiscounted future net cash flows 69,000 Value in use based on discounted future net cash flows using a discount rate of: 8%, which is Storm's incremental borrowing rate 42,000 2%, which is the risk-free rate on government bonds 47,000