On January 1, Year 4, Palmer Company (Palmer) purchased 70% of the outstanding common shares of Scott Limited (Scott) for $7,000. On that date, Scotts shareholders equity consisted of common shares of $260 and retained earnings of $4,600. The financial statements for Palmer and Scott for Year 9 were as follows: BALANCE SHEETS At December 31, Year 9 Palmer co. Scott ltd. Cash $1,350 $ 790 Accounts receivable 2,810 1,060 Inventory 3,410 2,590 Property, plant, and equipmentnet 4,350 3,020 Investment in Dandy 7,000 Total $18,920 $7,460 Current liabilities $4,370 $ 630 Long-term liabilities 3,110 1,240 Common shares 1,010 260 Retained earnings 10,430 5,330 Total $18,920 $7,460

STATEMENTS OF INCOME AND RETAINED EARNINGS For year ended December 31, Year 9

Palmer co. Scott ltd

Sales $21,950 $7,490

Cost of sales 14,820 3,300

Gross profit 7,130 4,190

Other revenue 1,630

Selling and administrative expenses (850 ( 430 )

Other expenses (5,330 ) (2,050)

Income before income taxes 2,580 1,710

Income tax expense 800 680

Net income 1,780 1,030

Retained earnings, beginning of year 10,430 5,190

Dividends paid (1,780 ) ( 890)

Retained earnings, end of year $10,430 $5,330

Additional Information

In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Scotts assets and liabilities were equal to their carrying amounts, except for the following: Carrying Amount Fair Value Inventory $2,110 $2,210 Equipment 2,510 3,010

Both companies use FIFO to account for their inventory and the straight-line method for amortizing their property, plant, and equipment. Dandys equipment had a remaining useful life of 10 years at the acquisition date.

Goodwill is not amortized on a systematic basis. However, each year, goodwill is evaluated to determine if there has been a permanent impairment. It was determined that goodwill on the consolidated balance sheet should be reported at its recoverable amount of $1,110 on December 31, Year 8, and $1,030 on December 31, Year 9.

During Year 9, inventory sales from Scott to Palmer were $4,000. Palmers inventories contained merchandise purchased from Scott for $1,500 at December 31, Year 8, and $2,600 at December 31, Year 9. Scott earns a gross margin of 50% on its intercompany sales.

On January 1, Year 5, Palmer sold some equipment to Scott for $1,100 and recorded a gain of $200 before taxes. This equipment had a remaining useful life of eight years at the time of the purchase by Scott.

Palmer charges $50 per month to Scott for consulting services and has been doing so throughout Years 8 and 9.

Palmer uses the cost method of accounting for its long-term investment.

Both companies pay taxes at the rate of 40%. Amortization expense is grouped with selling and administrative expenses, and impairment losses are grouped with other expenses.

Required: a. Calculate the consolidated net income for Year 9.

b. Calculate consolidated retained earnings at January 1, Year 9.

c. Prepare both the consolidated statement of income and statement of retained earnings (in good form), using the Direct method, for the year ended December 31, Year 9.

d. Calculate the following balances that would be shown on the consolidated balance sheet at December 31, Year 9. Show all components used to calculate these balances. i. Deferred Tax Asset

ii. Property, plant and equipment (net)

iii. Non-controlling interest (NCI)

All calculations must be shown to receive full marks. All #s must be shown in brackets on consolidated statements along with totals. Statements should be prepared in good form/format (include proper titling and there should be no abbreviations)