453 Assignment 3: Total marks 66 On January 1, Year 4, Par purchased 75% of the common shares of Sub for $4,200,000. On that date, Sub had common shares of $1,000,000 and retained earnings of $2,300,000. The fair values were equal to carrying values for all its net assets except the following: Inventory carrying value was greater than the fair value by $120,000; property, plant and equipment carrying value was less than the fair value by $800,000 (remaining useful life of 8 years), and note payable carrying value was less than the fair value by 90,000 (8 years to maturity) on Sub's books. The financial statements for Par and Sub for the year ended December 31, Year 8 were as follows: Statements of Income For the year ended December 31, Year 8 Par Sub $ 4,400,000 Sales Cost of sales Gross profit $ 5,000,000 3,200,000 2,920,000 1,800,000 1,480,000 Other income 410,000 230,000 Depreciation and amortization expense 700,000 600,000 Other expenses 740,000 500,000 Income tax expense 340,000 220,000 Net income 430,000 390,000 Retained earnings, beginning Net income Dividends paid Retained earnings, end Statements of Retained Earnings For the year ended December 31, Year 8 Cash and Accounts receivable Note receivable Inventory *Property, plant and equipment Accumulated depreciation Investment in Sub Total assets *Includes land 4,000,000 430,000 (140,000) $ 4,290,000 Balance Sheets December 31, Year 8 Par $ 1,400,000 500,000 2,400,000 3,300,000 390,000 (100,000) $ 3,590,000 Sub $ 1,100,000 450,000 1,600,000 3,690,000 1,150,000 5,390,000 2,500,000 4,200,000 $ 11,390,000 $ 5,690,000 Current liabilities Notes payable Common shares Retained earnings Total $ 1,300,000 800,000 5,000,000 4,290,000 $ 11,390,000 $ 600,000 500,000 1,000,000 3,590,000 $ 5,690,000 Additional information 1. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment was $500,000 in Year 6 and the recoverable value of goodwill December 31, Year 8 was $800,000. 2. During December Year 8, Par purchased merchandise from Sub for $800,000. Of this merchandise, 65% was resold by Par by December 31, Year 8. In December 31, Year 7, the inventories of Par contained $410,000 of merchandise purchased from Sub. Sub earns a gross margin of 30% on its sales to Par. 3. On March 1, Year 6, Sub sold land to Par for $700,000. Sub purchased the land on January 1, Year 5 for $510,000. In Year 8, Par sold 60% of this land to an outsider. 4. During Year 8, Sub charged Par $40,000 for professional services of which $10,000 was owing at December 31, Year 8 5. On July 1, Year 7, Sub sold a machine to Par for $315,000. Sub had paid $340,000 for this machine on July 1, Year 5 and had been depreciating the machine on a straight-line basis over 8 years. 6. Par accounts for its investment in Sub using the cost method. Both companies pay income taxes at the rate of 25%. Required: Show all work and round to the nearest dollar a) Prepare all 3 schedules (8 marks) b) Calculate Consolidated Net Income for Year 8 (8 marks) c) Calculate Consolidated Retained Earnings January 1, Year 8 (6 marks) d) Prepare the 3 Consolidated financial statements for Year 8 in good format (41 marks) e) Prepare the working paper journal entry(s) for the intercompany sale of inventory in Year 8 (3 marks) Hints: Goodwill = $1,710,000; AD left Dec. 31, Year 8= $1,066,250; Consolidated NI = $368,500; Total Consolidated assets $13,816,250