On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing shares valued at $1,200,000. On this date, Sauces building and machinery had estimated remaining useful lives of 10 years and 5 years respectively. Both Victory and Sauce use straight-line depreciation. The separate-entity statements of financial position for Victory and Sauce just prior to the acquisition are presented below.

Statements of Financial Position As of January 1, 20X7

Victory Co. Sauce Ltd.

	(Carrying Value)	(Carrying Value)	(Fair Value)
Noncurrent assets:
Land	$ -	$ 360,000	$ 640,000
Building	2,080,000	1,200,000	1,040,000
Accumulated depreciation	(320,000)	(400,000)
Machinery	1,400,000	1,040,000	80,000
Accumulated depreciation	(560,000)	(640,000)
Total noncurrent assets	2,600,000	1,560,000
Current assets:
Inventories	640,000	240,000	240,000
Accounts receivable	560,000	160,000	160,000
Cash	400,000	80,000	80,000
Total current assets	1,600,000	480,000
Total assets	$4,200,000	$2,040,000
Shareholders Equity:
Common shares	$1,760,000	$ 800,000
Retained earnings	1,800,000	520,000
Total shareholders equity	3,560,000	1,320,000
Noncurrent liabilities:
Long-term bank loan	-	400,000	400,000
Current liabilities:
A/P and accrued liabilities	640,000	320,000	320,000
Total liabilities	640,000	720,000
Total liabilities and shareholders equity	$4,200,000	$2,040,000

The separate-entity financial statements for Victory and Sauce at the end of 20X7 are presented below.

Statements of Financial Position

As of December 31, 20X7

Victory Co. Sauce Ltd.

Noncurrent assets:
Long-term loan receivable	$ 400,000	$ -
Land	-	1,080,000
Building	2,400,000	1,200,000
Accumulated depreciation	(360,000)	(480,000)
Machinery	1,600,000	1,040,000
Accumulated depreciation	(640,000)	(720,000)
Investment in Sauce Ltd.	1,200,000	____-___
Total noncurrent assets	4,600,000	2,120,000
Current assets:
Inventories	1,280,000	480,000
Amounts receivable	480,000	240,000
Cash	224,000	80,000
Total current assets	1,984,000	800,000
Total assets	$6,584,000	$2,920,000
Shareholders Equity:
Common shares	$2,960,000	$ 800,000
Retained earnings	2,784,000	1,080,000
Total shareholders equity	5,744,000	1,880,000
Noncurrent liabilities:
Long-term loans	520,000	800,000
Current liabilities:
Accounts payable	320,000	240,000
Total liabilities	840,000	1,040,000
Total liabilities and shareholders equity	$6,584,000	$2,920,000

Statements of Comprehensive Income

For the year ended December 31, 20X7

Victory Co. Sauce Ltd.

Sales	$16,000,000	$8,000,000
Dividend income	192,000	-
Other income	56,000	____-____
	16,248,000	8,000,000
Cost of sales	8,000,000	4,800,000
Other operating expenses	7,088,000	2,240,000
Interest expense	16,000	80,000
Total expenses	15,104,000	7,120,000
Net income and comprehensive income	$ 1,144,000	$ 880,000

Statements of Change in Equity Retained Earnings Section

For the year ended December 31, 20X7

Victory Co. Sauce Ltd.

Retained earnings, December 31, 20X6	$1,800,000	$ 520,000
Net income	1,144,000	880,000
Dividends declared	(160,000)	(320,000)
Retained earnings, December 31, 20X7	$2,784,000	$1,080,000

During 20X7, Victory and Sauce had the following transactions between them:

On June 30, 20X7, Sauce borrowed $400,000 from Victory at an interest rate of 10% (simple interest). Interest is to be paid at the end of each calendar year. Sauce did not pay the 20X7 interest.

During 20X7, Sauce sold $3,200,000 of goods to Victory. At the end of 2007, $800,000 of those goods were still in Victorys ending inventory. Sauce charged Victory the same price it charges all its other customers.

During 20X7, Victory sold $1,600,000 of goods to Sauce. At the end of 20X7, $320,000 of those goods were still in Sauces ending inventory. Victory charged Sauce the same price it charges all its other customers.

There was no impairment of goodwill for 20X7. The separate-entity financial statements for Victory and Sauce at the end of 20X8 are presented below.

Statements of Financial Position

As of December 31, 20X8

Victory Co. Sauce Ltd.

Noncurrent assets:
Land	$ -	$1,080,000
Building	3,040,000	1,200,000
Accumulated depreciation	(449,600)	(560,000)
Machinery	1,840,000	1,500,000
Accumulated depreciation	(544,000)	(516,000)
Investment in Sauce	1,200,000	____-___
Total noncurrent assets	5,086,400	2,704,000
Current assets:
Inventories	1,040,000	440,000
Accounts receivable	960,000	616,000
Cash	510,400	420,000
Total current assets	2,512,400	1,476,000
Total assets	$7,598,800	$4,180,000
Shareholders Equity:
Common shares	$2,960,000	$ 800,000
Retained earnings	2,784,000	1,640,000
Total shareholders equity	5,744,000	2,440,000
Noncurrent liabilities:
Long-term loan	1,440,000	960,000
Current liabilities:
Accounts payable	414,800	780,000
Total liabilities	1,854,800	1,740,000
Total liabilities and shareholders equity	$7,598,800	$4,180,000

Statements of Comprehensive Income

For the year ended December 31, 20X8

Victory Co. Sauce Ltd.

Sales	$17,600,000	$8,800,000
Dividend income	288,000	-
Gain on sale of machine	80.000
Other income	96,000	____-____
	18,064,000	8,800,000
Cost of sales	10,400,000	5,280,000
Other operating expenses	6,912,000	2,336,000
Interest expense	160,000	144,000
Total expenses	17,472,000	7,760,000
Net income and comprehensive income	$ 592,000	$ 1,040,000

Statements of Change in Equity Retained Earnings Section

For the year ended December 31, 20X8

Victory Co. Sauce Ltd.

Retained earnings, December 31, 20X7	$2,784,000	$1,080,000
Net income	592,000	1,040,000
Dividends declared	(592,000)	(480,000)
Retained earnings, December 31, 20X8	$2,784,000	$1,640,000

Additional information for 20X8:

During 20X8, Victory purchase $1,280,000 in goods from Sauce. At the end of the year, half of these goods were still in Victorys inventory.

During December 20X8, Sauce purchased $320,000 in goods from Victory. At the end of the year, all of these goods were still in Sauces inventory.

Both Victory and Sauces gross margins for these goods were unchanged from previous years.

At the end of 20X8, Sauce did not pay the interest due on the loan from Victory, however, both companies had accrued the interest.

Required:

Prepare the consolidated retained earnings statements for December 31st, 20X7.