On January 2, Year 5, (ABC) Ltd. acquired 70% of the outstanding voting shares of (XYZ) Ltd. The acquisition differential of $190,000 on that date was allocated in the following manner:

Inventory	$	20,000
Land		50,000
Plant and equipment		30,000			Estimated life 5 years
Patent		40,000			Estimated life 8 years
Goodwill		50,000
	$	190,000

The Year 9 income statements for the two companies were as follows:

	(ABC)				(XYZ)
Sales	$	3,600,000			$	2,000,000
Intercompany investment income		196,700
Rental revenue						60,000
Total income		3,796,700				2,060,000
Materials used in manufacturing		1,800,000				700,000
Changes in work-in-progress and finished goods inventory		30,000				(40,000	)
Employee benefits		450,000				380,000
Interest expense		150,000				40,000
Depreciation		305,000				285,000
Patent amortization						65,000
Rental expense		30,000
Income tax		200,000				347,000
Total expenses		2,965,000				1,777,000
Profit	$	831,700			$	283,000

Additional Information

• (XYZ) regularly sells raw materials to (ABC). Intercompany sales in Year 9 totalled $320,000.
• Intercompany profits in the inventories of (ABC) were as follows:

January 1, Year 9	$90,000
December 31, Year 9	70,000

• (ABC)s entire rental expense relates to equipment rented from (XYZ).
• A goodwill impairment loss of $3,000 occurred in Year 9.
• Retained earnings at December 31, Year 9, for (ABC) and (XYZ) were $2,524,700 and $1,050,000, respectively.
• (ABC) uses the equity method to account for its investment, and uses income tax allocation at the rate of 40% when it prepares consolidated statements.

Required:

(a)Prepare a consolidated income statement for Year 9 with expenses classified by nature.

(b)Calculate consolidated retained earnings at December 31, Year 9.