On JANUARY 2 , YEAR 4 POPLAR LTD PURCHASED 80% of Spruce Ltd. for $1,940,000. At that date, Spruce had common shares of $500,000 and retained earnings of $1,190,000 and accumulated depreciation of $540,000. Poplar acquired the Spruce shares to obtain control of mineral rights owned by Spruce. At the date of acquisition, these mineral rights were valued at $735,000, were not recognized on Spruce's separate-entity balance sheet, and had an useful life of 10 years. Except for the mineral rights, the carrying amount of the recorded assets and liabilities of Spruce were equal to their fair values. On December 31, Year 7, the trial balances of the two companies were as follows:

	Poplar	Spruce
Cash	$	940,000		$	516,000
Accounts receivable		1,880,000			298,000
Inventory		2,820,000			1,946,000
Plant and equipment		13,160,000			2,840,000
Investment in Spruce (cost)		1,940,000
Investment in bonds					242,000
Cost of goods sold		2,340,000			877,200
Other expenses		971,000			316,000
Interest expense		37,000
Income tax expense		663,200			290,000
Dividends		600,000			250,000
	$	25,351,200		$	7,575,200
Accounts payable	$	2,428,000		$	2,418,500
Accumulated depreciation: plant and equipment		3,903,900			940,000
Bonds payable		500,000
Premium on bonds payable		12,000
Common shares		4,500,000			500,000
Retained earnings, January 1		8,967,300			1,739,200
Sales		4,840,000			1,955,500
Dividend revenue		200,000
Interest revenue					22,000
	$	25,351,200		$	7,575,200

Additional Information

• The Year 7 net incomes of the two companies are as follows:

Poplar Ltd.	$	1,028,800
Spruce Ltd.		494,300

• The mineral rights owned by Spruce have increased in value since the date of acquisition and were worth $939,400 at December 31, Year 7.
• On January 2, Year 5, Poplar sold equipment to Spruce for $450,000. The equipment had a carrying amount of $360,000 at the time of the sale. The remaining useful life of the equipment was 5 years.
• The Year 7 opening inventories of Poplar contained $516,000 of merchandise purchased from Spruce during Year 6. Spruce had recorded a gross profit of $206,400 on this merchandise.
• During Year 7, Spruce's sales to Poplar totalled $1,016,000. These sales were made at a gross profit rate of 35%.
• Poplar's ending inventory contains $316,000 of merchandise purchased from Spruce.
• On January 2, Year 5, Poplar issued 8%, 7 year bonds with a face value of $500,000 for $521,000. Interest is paid annually on December 31. On January 2, Year 6, Spruce purchased one-half of this issue on the open market at a cost of $238,000.
• Other expenses include depreciation expense.
• Tax allocation will be at a rate of 40%.

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