On January 2, Year 4, Poplar Ltd. purchased 80% of the outstanding shares of Spruce Ltd. for
Question:
On January 2, Year 4, Poplar Ltd. purchased 80% of the outstanding shares of Spruce Ltd. for $2,020,000. At that date, Spruce had common shares of $500,000 and retained earnings of $1,270,000 and accumulated depreciation of $620,000. 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 $755,000, 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:
PoplarSpruceCash$1,020,000$502,000Accounts receivable2,040,000376,000Inventory3,060,0002,026,000Plant and equipment14,280,0002,920,000Investment in Spruce (cost)2,020,000Investment in bonds490,000Cost of goods sold2,420,000853,400Other expenses964,000302,000Interest expense40,000Income tax expense631,600370,000Dividends600,000250,000$27,075,600$8,089,400Accounts payable$2,512,000$2,498,500Accumulated depreciation: plant and equipment4,032,2001,020,000Bonds payable500,000Premium on bonds payable8,000Common shares4,500,000500,000Retained earnings, January 110,403,4002,027,400Sales4,920,0002,020,000Dividend revenue200,000Interest revenue23,500$27,075,600$8,089,400
Additional Information
- The Year 7 net incomes of the two companies are as follows:
Poplar Ltd.$1,060,000Spruce Ltd.522,500
- The mineral rights owned by Spruce have increased in value since the date of acquisition and were worth $926,800 at December 31, Year 7.
- On January 2, Year 5, Poplar sold equipment to Spruce for $520,000. The equipment had a carrying amount of $416,000 at the time of the sale. The remaining useful life of the equipment was 5 years.
- The Year 7 opening inventories of Poplar contained $502,000 of merchandise purchased from Spruce during Year 6. Spruce had recorded a gross profit of $200,800 on this merchandise.
- During Year 7, Spruce's sales to Poplar totalled $1,002,000. These sales were made at a gross profit rate of 35%.
- Poplar's ending inventory contains $302,000 of merchandise purchased from Spruce.
- Other expenses include depreciation expense.
- Tax allocation will be at a rate of 40%.
Required:
(a)Prepare the following consolidated financial statements for Year 7:
(i)Income statement(Input all values as positive numbers.)