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On January 1, Year 4, Grant Corporation bought 5,000 (80%) of the outstanding common shares of Lee Company for $43,750 cash. Lees shares were trading

On January 1, Year 4, Grant Corporation bought 5,000 (80%) of the outstanding common shares of Lee Company for $43,750 cash. Lees shares were trading for $7 per share on the date of acquisition. On that date, Lee had $15,625 of common shares outstanding and $18,750 retained earnings. Also on that date, the carrying amount of each of Lees identifiable assets and liabilities was equal to its fair value except for the following:

Carrying Amount Fair Value
Inventory $ 31,250 $ 34,375
Patent 6,250 12,500

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:

BALANCE SHEETS
At December 31, Year 7
Grant Lee
Assets
Cash $ 3,125 $ 11,250
Accounts receivable 115,625 51,250
Inventory 193,750 62,500
Investment in Lee 43,750
Equipment, net 143,750 128,125
Patent, net 1,250
$ 500,000 $ 254,375
Liabilities and Shareholders Equity
Accounts payable $ 118,750 $ 121,875
Other accrued liabilities 37,500 31,250
Income taxes payable 50,000 45,000
Common shares 106,250 15,625
Retained earnings 187,500 40,625
$ 500,000 $ 254,375
INCOME STATEMENT
Year ended December 31, Year 7
Grant Lee
Sales $ 562,500 $ 225,000
Cost of goods sold (212,500 ) (150,000 )
Gross margin 350,000 75,000
Distribution expense (18,750 ) (15,625 )
Other expenses (112,500 ) (35,000 )
Income tax expense (75,000 ) (10,000 )
Net income $ 143,750 $ 14,375

Additional Information

  • The recoverable amount for goodwill was determined to be $6,250 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
  • Grants accounts receivable contains $18,750 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.)

On January 1, Year 4, Grant Corporation bought 5,000 (80%) of the outstanding common shares of Lee Company for $43,750 cash. Lees shares were trading for $7 per share on the date of acquisition. On that date, Lee had $15,625 of common shares outstanding and $18,750 retained earnings. Also on that date, the carrying amount of each of Lees identifiable assets and liabilities was equal to its fair value except for the following:

Carrying Amount Fair Value
Inventory $ 31,250 $ 34,375
Patent 6,250 12,500

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:

BALANCE SHEETS
At December 31, Year 7
Grant Lee
Assets
Cash $ 3,125 $ 11,250
Accounts receivable 115,625 51,250
Inventory 193,750 62,500
Investment in Lee 43,750
Equipment, net 143,750 128,125
Patent, net 1,250
$ 500,000 $ 254,375
Liabilities and Shareholders Equity
Accounts payable $ 118,750 $ 121,875
Other accrued liabilities 37,500 31,250
Income taxes payable 50,000 45,000
Common shares 106,250 15,625
Retained earnings 187,500 40,625
$ 500,000 $ 254,375
INCOME STATEMENT
Year ended December 31, Year 7
Grant Lee
Sales $ 562,500 $ 225,000
Cost of goods sold (212,500 ) (150,000 )
Gross margin 350,000 75,000
Distribution expense (18,750 ) (15,625 )
Other expenses (112,500 ) (35,000 )
Income tax expense (75,000 ) (10,000 )
Net income $ 143,750 $ 14,375

Additional Information

  • The recoverable amount for goodwill was determined to be $6,250 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
  • Grants accounts receivable contains $18,750 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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