On January 2, Year 3, Peter Ltd. purchased 80% of the outstanding shares of Saul Ltd. for $2,000,000. At that date, Saul had common shares of $800,000 and retained earnings of $1,250,000. Saul also had 3,000 5% Cumulative Preference Shares, redeemable at $105. Peter acquired the Saul Common Shares to obtain control of patents owned by Saul. At the date of acquisition, the carrying amount of the recorded assets and liabilities of Saul were equal to their fair values except for the following:

1.Inventory was overvalued by $200,000

2.Plant and Equipment with a carrying amount of $1,050,000 had a fair value of $1,350,000.

3.Patents valued at $750,000, were not recognized on Saul's separate entity balance sheet at the date of the acquisition and had 40 Year useful life.

4.Accounts Receivable balances recorded in the books were in excess of the fair value by $436,000

5.Accounts Payable was overvalued by $11,000

Plant and Equipment on the date of the acquisition had a useful life of 10 years.

Goodwill, if any, is tested annually for impairment. On December 31, Year 5 goodwill was impaired by $5,000. On December 31, Year 8 goodwill was valued at $20,000

Saul inventory turnover is 60 days and the Accounts Receivable and Accounts Payable balances are collected and paid respectively net 30.

On December 31 Year 8, the trial balances of the two companies were as follows:

Trial Balances of Peter and Saul as at December 31, Year 8

Peter

Saul

Cash

826,000

534,500

Accounts Receivable

2,400,000

1,306,000

Loan Receivable

250,000

Inventory

3,000,000

806,000

Plant and Equipment

13,000,000

2,900,000

Land

800,000

Investment in Saul

2,000,000

-

Cost of Goods Sold

3,400,000

1,037,000

Other Expenses

962,000

325,000

Interest Expense

30,000

-

Income Tax Expense

600,000

300,000

Dividends

600,000

250,000

26,818,000

8,508,500

Accounts Payable

2,000,000

1,278,500

Loan Payable

250,000

Accumulated Amortization: Plant

and Equipment

8,000,000

2,100,000

Common Shares

4,500,000

800,000

5% Cumulative Preference Shares

300,000

Retained Earnings January 1

7,000,000

2,000,000

Sales

4,855,000

2,000,000

Other Revenue - Management Fees

25,000

Dividend Revenue

188,000

-

Interest Revenue

-

30,000

26,818,000

8,508,500

Additional information:

1.On January 2, Year 4, Saul sold equipment to Peter for $520,000. The equipment had a carrying amount of $400,000 at the time of the sale. The remaining useful life of the equipment was six years.

2.The Year 8 opening inventories of Peter contained $500,000 of merchandise purchased from Saul during Year 7. Saul had recorded a gross profit of

$200,000 on this merchandise. Peter's ending inventory contains $300,000 of merchandise purchased from Saul.

3.On January 2 year 5, Peter sold land to Saul for $800,000. The carrying value of the land in Peter's books was $300,000 on the date of the sale. Saul sold 1/3rd of the land to an arm's length third party in Year 8.

4.The December 31, Year 8 and December 31, Year 7 inventories of Saul contain $600,000 and $400,000 merchandize purchased from Peter respectively.

5.Peter's sales to Saul are priced to provide Peter with a gross profit of 20%.

6.Saul's sales to Peter were made at a gross profit rate of 40%.

7.Other expenses include depreciation expense.

8.Saul's dividends of $250,000 includes payment of dividends to

Preference Shareholders.

9.During year 8 the following inter-company transactions took place:

a.Saul made a $25,000 payment to Peter for management fees, which was recorded as other expenses.

b.On January 1 Year 5, Peter borrowed $250,000 from Saul and signed a note bearing interest at 12%. Interest on the note was paid on December 31 each year.

c.Saul's sales to Peter were $800,000.

d.Peter's sales to Saul were $1,000,000.

e.Peter owed Saul $120,000 on account of purchases from Saul

f.Saul owed Peter $50,000 on account of purchases from Peter 11.Tax allocation will be at a rate of 40%.

Required: Prepare in good form the following consolidated financial statements:

1.Consolidated Income Statement of Peter for the Year Ended December 31 Year 8

2.Consolidated Statement of Retained Earnings as at December 31, Year 8

3.Consolidated Balance Sheet of Peter for the year ended December 31, Year 8

Show all your workings.