On December 31, Year 5, Puff Company purchased 80% of the outstanding common shares of the Smoke Company for $5 million in cash when Smoke's shareholders' equity consisted of $2,000,000 of common shares and $6,000,000 of retained earnings. There was no acquisition differential. For the year ending December 31, Year 10, the income statements for Puff and Smoke were as follows:

	Puff	Smoke
Sales and Other Income	$24,800,00	$11,000,000
Cost of Goods Sold	18,000,000	8,200,000
Depreciation Expense	3,400,000	1,800,000
Income Tax and Other Expense	4,200,000	1,600,000
Total Expenses	25,600,000	11,600,000
Net Income	$3,200,000	$1,400,000

 

At December 31, Year 10, the condensed balance sheets for the two companies were as follows:

	Puff	Smoke
Current Assets	$12,000,000	$5,800,000
Investment in S	5,600,000
Other noncurrent assets	23,000,000	17,400,000
Total assets	$40,600,000	$23,200,000
Liabilities	$23,400,000	$10,800,000
Common Shares	4,000,000	2,000,000
Retained Earnings	13,200,000	10,400,000
Total Liabilities and Equity	$40,600,000	$23,200,000

 

Other information:

1. During Year 10, Puff sold merchandise to Smoke for $600,000. Seventy-five percent of this merchandise remains in Smoke's inventory at December 31, Year 10. On December 31, Year 9, the inventory of Smoke contained $100,000 of merchandise purchased from Puff. Puff earns a gross margin of 30% on its intercompany sales.
2. On January 2, Year 8, Smoke sold land to Puff for $1,200,000. Smoke purchased the land on January 1, Year 6, for $1,100,000. Puff still owns this land at December 31, Year 10.
3. During Year 10, Puff declared and paid dividends of $2,600,000, while Smoke declared and paid dividends of $800,000.
4. Puff accounts for its investment in Smoke using the cost method.
5. Both companies pay income tax at the rate of 35%.

Required:

1. Prepare a schedule to show the calculation of consolidated net income. Include attribution to both shareholder groups.
2. Prepare an intercompany profit analysis to show intercompany transaction schedule of profit before and after tax as well as the tax effects.
3. Calculate consolidated retained earnings at December31, Year 10.