On January 1, Year 4, Grant Corporation bought 27,000 (80%) of the outstanding common shares of Lee Company for $236,250 cash. Lees shares were trading
On January 1, Year 4, Grant Corporation bought 27,000 (80%) of the outstanding common shares of Lee Company for $236,250 cash. Lee’s shares were trading for $7 per share on the date of acquisition. On that date, Lee had $84,375 of common shares outstanding and $101,250 retained earnings. Also on that date, the carrying amount of each of Lee’s identifiable assets and liabilities was equal to its fair value except for the following: Carrying Amount Fair Value Inventory $ 168,750 $ 185,625 Patent 33,750 67,500 The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was sold during Year 4. Grant uses the cost method to account for its investment.
The following are the separate-entity financial statements of Grant and Lee as at December 31, Year 7:
The following are the separate-entity financial statements of Grant and Lee as at December 31, Year 7:
BALANCE SHEETS | |||||
At December 31, Year 7 | |||||
Grant | Lee | ||||
Assets | |||||
Cash | $ | 16,875 | $ | 60,750 | |
Accounts receivable | 624,375 | 276,750 | |||
Inventory | 1,046,250 | 337,500 | |||
Investment in Lee | 236,250 | ||||
Equipment, net | 776,250 | 691,875 | |||
Patent, net | 6,750 | ||||
$ | 2,700,000 | $ | 1,373,625 | ||
Liabilities and Shareholders’ Equity | |||||
Accounts payable | $ | 641,250 | $ | 658,125 | |
Other accrued liabilities | 202,500 | 168,750 | |||
Income taxes payable | 270,000 | 243,000 | |||
Common shares | 573,750 | 84,375 | |||
Retained earnings | 1,012,500 | 219,375 | |||
$ | 2,700,000 | $ | 1,373,625 | ||
Year ended December 31, Year 7 | |||||||
Grant | Lee | ||||||
Sales | $ | 3,037,500 | $ | 1,215,000 | |||
Cost of goods sold | (1,147,500 | ) | (810,000 | ) | |||
Gross margin | 1,890,000 | 405,000 | |||||
Distribution expense | (101,250 | ) | (84,375 | ) | |||
Other expenses | (607,500 | ) | (189,000 | ) | |||
Income tax expense | (405,000 | ) | (54,000 | ) | |||
Net income | $ | 776,250 | $ | 77,625 | |||
Additional Information
- The recoverable amount for goodwill was determined to be $33,750 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
- Grant’s accounts receivable contains $101,250 owing from Lee.
- Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses.
Required:
(a) Calculate consolidated retained earnings at December 31, Year 7. (Input all values as positive numbers. Omit $ sign in your response.)
Calculation of consolidated retained earnings – Dec 31, Year 7 | |||
Retained earnings – Grant | $ | ||
Retained earnings – Lee | $ | ||
Retained earnings on acquisition | |||
Increase | $ | ||
Grant's share | % | ||
Less: Changes to acquisition differential | |||
$ | |||
(b) Prepare consolidated financial statements for Year 7. (Input all values as positive numbers.)
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