On January 1, Year 5, Pen Company purchased 80% of the shares of Sacola for $800,000.On that date, Polka's shareholder's equity consisted of $300,000 of common shares and $555,000 of retained earnings.This figure included existing goodwill of $30,000.The carrying value of Sacola's identifiable net assets was equal to their fair values except:

Book valueFair value

Inventory23,00033,000

Equipment50,00090,000

Patent020,000

The equipment has a 10 year remaining useful life and the patent had 10 years remaining.Both are amortized using straight line amortization.

During Year 8, a goodwill impairment loss of $12,000 occurred.During Year 10, a goodwill impairment loss of $14,000 occurred.

The tax rate for both firms is 30%, and Pen uses the FVE and cost methods to account for its investment.Note that Sacola paid dividends.

Financial statements for Year 10 are below:

Statements of Financial Position

December 31, Year 10

Pen

Sacola

Cash

50,000

20,000

Accounts receivable

150,000

160,000

Inventory

180,000

100,000

Land

500,000

300,000

Equipment

4,500,000

2,400,000

Accumulated depreciation, equipment

(1,770,000)

1,240,000

Investment in Sacola

800,000

Other investments

100,000

Total Assets

4,510,000

1,740,000

Accounts payable

450,000

200,000

Long term liabilities

300,000

500,000

Common shares

1,200,000

300,000

Retained earnings

2,560,000

740,000

Total liabilities and shareholder's equity

Income Statements

Year Ended December 31, Year 10

Pen

Sacola

Sales

2,000,000

1,500,000

Cost of goods sold

1,200,000

900,000

Gross profit

800,000

600,000

Royalty revenue

150,000

Dividend income

72,000

Depreciation expense

250,000

120,000

Other expenses

187,000

221,000

Income tax expense

120,000

70,000

Net income

465,000

189,000

Retained earnings, beginning of year

2,395,000

641,000

Net income

465,000

189,000

Dividends

300,000

90,000

Retained earnings, end of year

2,560,000

1,799,000

Other information:

1. Intercompany sales:Inventories on January 1, Year 10, contained:

Sacola had on hand $20,000 of goods purchased from Pen.Pen had on hand $100,000 of goods purchased from Sacola.Both companies use a gross profit of 40% of sales.

During Year 10, Pen sold $128,000 of goods to Sacola.On December 31, Year 10, 40% of the goods were unsold.

128,000

Sacola sold $728,000 of goods to Pen.On Dec. 31, Year 10, 10% were unsold.Both companies have a gross profit on sales of 40%.There were no other intercompany sales.

* 728,000

2. During Year 6, Pen sold land to Sacola at a profit of $60,000.Sacola still owns the land.

Required: Prepare the following:

1) Consolidated income statement for Year 10 in good form. Use the form below.

2) i) Calculate the following consolidated account balances for December 31, Year 10.Show all your calculations for possible part marks and clearly label your answers. Use the form below the income statement.

i) NCI Balance Sheet

ii) Property, plant and equipment, net

iii) Inventory

iv) Deferred tax asset

v) Goodwill

vi) Consolidated Retained earnings

To , you will need the following tables:

a) Calculation of goodwill and allocation of acquisition differential.

b) ADA and goodwill impairment table up to and including Year 10.

c) Calculation of realized and unrealized profit in intercompany inventory sales.

d) Calculation of unrealized profit in intercompany sale of depreciable assets and land.

e) Calculation of consolidated net income

f) Calculation of ending retained earnings.

g) Calculation of NCI - Balance Sheet