P Inc. purchased 90% of the voting shares of S Inc for $1,000,000 cash on January 1, 2013; in addition, the purchase agreement also included a contingent consideration payable in cash on January 1, 2019. Assume that since the acquisition date management believes that $200,000 is the contingent consideration likely to become payable on January 1, 2019 (ignore time value of money). P uses the cost method to account for its investment. On that date, Ss Common Stock and Retained Earnings were valued at $400,000 and $600,000 respectively.

Ss fair values approximated its carrying values with the following exceptions:

The equipment had a fair value which was $ 50,000 higher than its carrying value, and was estimated to have a remaining useful life of 10years from the date of acquisition with no salvage value.

Ss inventory had a fair value which was $1,000 less than book value. This inventory was sold by S in 2013.

Both companies use straight line amortization exclusively for all assets and liabilities. The effective tax rate for both companies is 40%.

The Financial Statements of P & S for the Year ended December 31, 2016 are shown below:

Income Statements

P Inc. S Inc.

Sales $1,400,000 $930,000

Other Revenues $400,000 $300,000

Less: Expenses:

Cost of Goods Sold: $800,000 $330,000

Depreciation Expense $30,000 $20,000

Other Expenses $120,000 $240,000

Income Tax Expense $170,000 $120,000

Net Income $680,000 $520,000

Retained Earnings Statements

Balance, Jan 1, 2016 $950,000 $780,000

Net Income $680,000 $520,000

Less: Dividends ($150,000) ($120,000)

Retained Earnings $1,480,000 $1,180,000

Balance Sheets

P Inc. S Inc.

Cash $100,000 $440,000

Accounts Receivable $300,000 $510,000

Inventory $320,000 $475,000

Investment in S Inc. $1,000,000 -

Land $100,000 $80,000

Equipment (net) $220,000 $210,000

Total Assets $2,040,000 $1,715,000

Current Liabilities $160,000 $135,000

Common Shares $400,000 $400,000

Retained Earnings $1,480,000 $1,180,000

Total Liabilities and Equity $2,040,000 $1,715,000

Other Information:

During 2016, S sold a parcel of land to P for $100,000. S had purchased this land in 2012 for $20,000. P is currently using the land to hold excess inventory.

During 2016 P charged S $17,000 of management fees. S paid $10,000 cash during the year and expects to pay the remaining $7,000 sometime in 2017.

During December 2016, S sold inventory to P for $100,000, the cost of the inventory to S was $80,000. 50% of these goods remained in Ps inventory at the end of 2016.

During December 2015, P sold inventory to S for $60,000, the cost of the inventory to P was $30,000. 40% of these goods remained in Ss inventory at the end of 2015. S eventually sold the entire inventory to an outside customer in 2016.

REQUIRED:

a)Prepare a schedule showing the calculation of goodwill at the date of acquisition of S under the entity theory, and a purchase price discrepancy amortization schedule.

b)Prepare a schedule showing the inter-company realized and unrealized profits for 2013 to 2016. Your schedule should include both pre-tax and after-tax amounts.

c) Prepare the consolidated financial statements under the entity theory: Income statement and Retained Earnings for the year ended December 31^st, 2016, and Balance Sheet as at December 31^st, 2016. Show all supporting calculations. NOTE: In preparing Consolidated Statement of Retained Earnings you need to first calculate the opening retained earnings.