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Item 2

On January 2, Year 4, Poplar Ltd. purchased 80% of the outstanding shares of Spruce Ltd. for $2,060,000. At that date, Spruce had common shares of $500,000 and retained earnings of $1,310,000 and accumulated depreciation of $660,000. Poplar acquired the Spruce shares to obtain control of mineral rights owned by Spruce. At the date of acquisition, these mineral rights were valued at $765,000, were not recognized on Spruces separate-entity balance sheet, and had an useful life of 10 years. Except for the mineral rights, the carrying amount of the recorded assets and liabilities of Spruce were equal to their fair values. On December 31, Year 7, the trial balances of the two companies were as follows:

	Poplar			Spruce
Cash	$	1,060,000		$	506,000
Accounts receivable		2,120,000			416,000
Inventory		3,180,000			2,066,000
Plant and equipment		14,840,000			2,960,000
Investment in Spruce (cost)		2,060,000
Investment in bonds					494,000
Cost of goods sold		2,460,000			860,200
Other expenses		968,000			306,000
Interest expense		44,000
Income tax expense		694,800			410,000
Dividends		600,000			250,000
	$	28,026,800		$	8,268,200
Accounts payable	$	2,552,000		$	2,538,500
Accumulated depreciation: plant and equipment		4,096,600			1,060,000
Bonds payable		500,000
Premium on bonds payable		8,000
Common shares		4,500,000			500,000
Retained earnings, January 1		11,210,200			2,082,200
Sales		4,960,000			2,060,000
Dividend revenue		200,000
Interest revenue					27,500
	$	28,026,800		$	8,268,200

Additional Information

• The Year 7 net incomes of the two companies are as follows:

Poplar Ltd.	$	980,000
Spruce Ltd.		524,500

• The mineral rights owned by Spruce have increased in value since the date of acquisition and were worth $930,400 at December 31, Year 7.
• On January 2, Year 5, Poplar sold equipment to Spruce for $560,000. The equipment had a carrying amount of $448,000 at the time of the sale. The remaining useful life of the equipment was 5 years.
• The Year 7 opening inventories of Poplar contained $506,000 of merchandise purchased from Spruce during Year 6. Spruce had recorded a gross profit of $202,400 on this merchandise.
• During Year 7, Spruces sales to Poplar totalled $1,006,000. These sales were made at a gross profit rate of 35%.
• Poplars ending inventory contains $306,000 of merchandise purchased from Spruce.
• Other expenses include depreciation expense.
• Tax allocation will be at a rate of 40%.

Required:

(a) Prepare the following consolidated financial statements for Year 7:

(i) Income statement (Input all values as positive numbers.)

(ii) Retained earnings statement (Input all values as positive numbers. Omit $ sign in your response.)

Poplar Ltd.
Consolidated Statement of Retained Earnings
Year 7
(Click to select) Retained earnings, December 31, Year 7 Retained earnings, January 1, Year 7	$
(Click to select) Less: Net income Add: Net income
(Click to select) Add: Dividends Less: Dividends
(Click to select) Retained earnings, January 1, Year 7 Retained earnings, December 31, Year 7	$

(iii) Balance sheet (Amounts to be deducted should be indicated with a minus sign.)

(b) Calculate the December 31, Year 7, balance in the account Investment in Spruce if Poplar had used the equity method to account for its investment. (Omit $ sign in your response.)

Balance, Dec. 31, Year 7 $

(c) Not available in Connect.