On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of Dandy Limited (Dandy) for $13,300. On that date, Dandy's shareholders' equity consisted of common shares of $1,250 and retained earnings of $6,500.

The financial statements for Handy and Dandy for Year 9 were as follows:

Additional Information:

• In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets and liabilities were equal to their carrying amounts, except for the following:

• Both companies use FIFO to account for their inventory and the straight-line method for amortizing their property, plant, and equipment. Dandy's equipment had a remaining useful life of 10 years at the acquisition date.

• Goodwill is not amortized on a systematic basis. However, each year, goodwill is evaluated to determine if there has been a permanent impairment. It was determined that goodwill on the consolidated balance sheet should be reported at its recoverable amount of $1,300 on December 31, Year 8, and $1,220 on December 31, Year 9.

• During Year 9, inventory sales from Dandy to Handy were $5,900. Handy's inventories contained merchandise purchased from Dandy for $3,400 at December 31, Year 8, and $4,500 at December 31, Year 9. Dandy earns a gross margin of 50% on its intercompany sales. 

• On January 1, Year 5, Handy sold some equipment to Dandy for $3,000 and recorded a gain of $360 before taxes. This equipment had a remaining useful life of eight years at the time of the purchase by Dandy. 

• Handy charges $50 per month to Dandy for consulting services and has been doing so throughout Years 8 and 9.

• Handy uses the cost method of accounting for its long-term investment. 

• Both companies pay taxes at the rate of 40%.

• Amortization expense is grouped with production expenses, and impairment losses are grouped with other expenses. 

Required:

(a) Prepare a consolidated statement of income for the year ended December 31, Year 9. Show supporting calculations.

(b) Calculate consolidated retained earnings at January 1, Year 9, and then prepare a consolidated statement of retained earnings for the year ended December 31, Year 9. Show supporting calculations.

(c) Explain how the historical cost principle supports the adjustments made on consolidation when there has been an intercompany sale of equipment.

(d) Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for the year ended December 31, Year 9, under the parent company extension theory. 

(e) Prepare the consolidated financial statements using the worksheet approach.

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BALANCE SHEETS At December 31, Year 9 Dandy $ 980 Handy $ 1,540 Cash Accounts receivable 3,000 1,250 3,600 Inventory Property, plant, and equipment-net Investment in Dandy 4,250 4,540 3,210 7,000 $ 9,690 $ 680 $19,680 Total $ 4,560 Current liabilities Long-term liabilities 3,300 1,430 Common shares 1,200 450 Retained earnings 7,130 $ 9,690 10,620 Total $19,680 STATEMENTS OF INCOME AND RETAINED EARNINGS For year ended December 31, Year 9 Handy Dandy $22,900 $8,440 Sales 15,200 Cost of sales 3,680 Gross profit 7,700 4,760 Other revenue 1,820 Selling and administrative expense (1,040) (620) Other expenses (5,520) (2,240) Income before income taxes 2,960 1,900 Income tax expense 1,000 840 Net income 1,960 1,060 Retained earnings, beginning of year Dividends paid Retained earnings, end of year 10,620 7,050 (1,960) $10,620 (980) $7,130 Carrying Amount Fair Value Inventory $2,300 $2,400 Equipment 2,700 3,200