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Question 2) The financial statement of Pa and Son as at December 31, Year 6 are shown below: Balance sheet At December 31, year 6 Assets Pa Son Cash $ 14,000 $ 16,800 Receivables 25,000 21,000 Inventory 45,000 50,000 Land 20,000 10,000 Property, plant and equipment 175,000 250,000 Accumulated depreciation 35,000 40,000 Other assets 59,600 -Investment in Son 170,000 -473,600 307,800 liabilities and share holders' equity current liabilities long-term liabilities common shares retained earnings Retained earnings, Jan 1 Net Income Dividends Retained earnings 36,400 ----350,000 87,200 $ 473,600 statement of retained earnings For the year ended December 31, year 6 Pa 77,600 34,600 25,000 87,200 Income Statement For the year ended December 31, year 6 Pa Sales revenue 430,200 Other income 42,400 Cost of goods sold 350,000 Depreciation & amortization expense 18,000 General and administration expense 57,000 Interest expense ---Income tax expense 13,000 Net income 34,600 37,800 102,500 125,000 42,500 $307,800 Son 25,000 29,500 12,000 42,500 Son 270,000 -----173,000 28,000 19,000 9,500 11,000 29,500 1. Pa acquired 80% of Son's common stock on January 1, year 1 for $170,000. At that date, Son's reported a retained earnings balance of $20,000 and common shares $125,000. On that date, Son's net assets were equal to fair market value with the exception of the following: Carrying Value Fair Value Inventory $50,000 $60,000 Equipment (10 years useful life remaining) $260,000 $240,000 Land $10,000 $12,000 2. Annual impairment tests of goodwill result in losses of $8,000 in year 3 and $2,500 in year 6. 3. Pa uses the cost method. 4. Assume 40% corporate tax rate. 5. Son's sales during year 6 include $70,000 of sales to Pa. Goods purchased from Son and included in Pa's inventories were $50,000 at the end of year 5 and $30,000 at the end of year 6. Son's gross profit margin to Pa is 30%. 6. During year 6, Pa sold inventory that it had purchased for $80,000 to Son for $100,000. 30% of the inventory was resold by Son by December 31, year 6. 7. On April 1, year 6, PA sold machinery to Son for $40,000. The carrying value of the machinery at that date of sale was $48,000. The remaining useful life of the machinery on that date was 4 years. 8. On January, year 4, Son sold a building to Pa for $60,000. Son had Purchased the building on January 1, year 1 for $80,000 and it had an estimated 8 year life on that date with no salvage value. 9. On May 1, year 6, Son borrowed $10,000 from Pa. the one-year note had interest rate of 6%. Both the principal and interest was payable at maturity. Required 1. a) Prepare the calculation and allocation of AD schedule and the AD amortization and goodwill impairment schedule. b) Prepare the intercompany profits, gains and losses schedule. c) Calculate the consolidated net income for year 6 d) Calculate the consolidated retained earnings at Jan. 1, Year 6. e) Prepare in good form the following for year 6: Consolidated income statement Consolidated retained earnings statement Consolidated balance sheet 2. Prepare the paper eliminating journal entries for the inter-company sale of the machinery in Year 6