On January 1, Year 5, Par Company purchased 85% of the outstanding common shares ofSub Company for $9 million in cash. On that date, the shareholders equity of Subconsisted of $2 million in common shares and $6 million in retained earnings. For theyear ended December 31, Year 10, the income statements for Par and Sub were asfollows:

Par Sub

Sales $ 24,800,000 $ 12,000,000

Other Income 4,000,000 900,000

Cost of goods sold 18,000,000 8,200,000

Depreciation expense 3,400,000 1,800,000

Other expenses 3,000,000 1,200,000

Income tax 1,200,000 400,000

Net income $ 3,200,000 $ 1,300,000

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

Par Sub

Cash and receivables $ 13,000,000 $ 7,000,000

Inventory 2,000,000 1,800,000

Land 4,000,000 1,400,000

Plant and equipment 20,200,000 19,000,000

Accumulated depreciation 4,600,000 3,000,000

Investment in Sub 9,000,000

Total assets $ 43,600,000 $ 26,200,000

Current liabilities $ 8,000,000 $ 6,000,000

Long term liabilities 18,400,000 7,800,000

Common shares 4,000,000 2,000,000

Retained earnings 13,200,000 10,400,000

Total liabilities and shareholders equity $ 43,600,000 $ 26,200,000

Other information1. On January 1, Year 5, Sub had inventory with a fair value that was $90,000 greaterthan its carrying value.

2. On January 1, Year 5, Sub had equipment with a fair value that was $200,000 higherthan its carrying value. The equipment had an estimated remaining useful life of 10 years.

3. Each year, goodwill is evaluated to determine if there has been a permanentimpairment. Goodwill had a recoverable value of $2,080,000 at December 31, Year 9 and$2,000,000 at December 31, Year 10. (Hint: need to determine impairment losses)

4. During Year 10, Sub sold merchandise to Par for $550,000, 60% of which remains inPars inventory at December 31, Year 10. On December 31, Year 9, the inventory of Parcontained $100,000 of merchandise purchased from Sub. Sub earns a gross margin of30% on its sales.

5. On January 2, Year 7, Sub sold land to Par for $1,000,000. Sub purchased the land onJanuary 1, Year 3 for $700,000. In Year 10, Par sold 30% of this land to an outsider.

6. During Year 10, Par declared and paid dividends of $2,500,000, while Sub declaredand paid dividends of $800,000.

7. At December 31, Year 10, Sub owed Par $20,000 in an interest bearing note at 5%(note was issued in Year 8). The note is due December 31, Year 11

8. Par accounts for its investment in Sub using the cost method.

9. Both companies pay income tax at the rate of 40%.

Required

a. Calculate the consolidated net income for Year 10

b. Calculate the consolidated retained earnings at January 1, Year 10.

c. Prepare the consolidated financial statements for the year ended December 31, Year10.

d. If Par had used the parent company extension theory (see chapter 4), briefly explainwhether total shareholders equity for Year 10 would increase, decrease, or not change