1. On January 1, 2014, PT X acquired 800 common shares of PT Y for $24,000 and 180 $5 cumulative, nonparticipating preferred shares for $19,800. On this date, the shareholders equity accounts of PT Y were as follows:

Common shares (1,000 no par value shares issued) $10,000

Preferred shares (200 no par value shares issued) 20,000

Retained earnings (note 1) 12,000

Note 1: Preferred dividends were two years in arrears on January 1, Year 2014.

The income statements for the two companies for the year ended December 31, Year 2018, are presented below

INCOME STATEMENTS

For year ended December 31, Year 2018

	PT X	PT Y
Sales	$600,000	$400,000
Dividend and management fees	27,500
Rental revenue		11,200
	627,500	411,200
Cost of sales	343,900	234,700
Distribution expense	25,000	70,000
Selling and administrative expense	207,000	74,000
Interest expense	1,700	6,000
Income tax expense	20,000	9,000
	597,600	393,700
Profit	$ 29,900	$17,500

Additional Information:

Any acquisition differential is allocated to patents, to be amortized over 10 years.

In Year 2018, PT Y paid dividends totaling $9,000. Preferred dividends were two years in arrears on December 31, Year 2017.

PT X uses the cost method to account for its investment in PT Y.

PT Y purchases merchandise for resale from PT X. In Year 2018, PT Y purchased $33,000 in merchandise from PT X and had items in inventory on December 31, Year 2018, on which PT X had made a profit of $2,500. The January 1, Year 2018, inventory contained an intercompany profit of $1,400.

PT X rents equipment from PT Y, and in Year 2018 paid a rental charge of $3,000 and recorded an account payable to PT Y of $2,000 for the balance of the rentals.

On July 1, Year 2016, PT Y sold a building to PT X at a profit of $13,000. PT X is depreciating this building on a straight-line basis over a 10-year useful life.

Depreciation and rent of tangible capital assets are included in distribution expense, whereas amortization of intangible assets is included in selling and administrative expense.

PT Y paid $20,000 to PT X for management fees in Year 2018.

Assume a corporate tax rate of 40%.

Required:

Prepare a consolidated income statement for Year 2018.