Question 2. 68 marks On January 1, Year 5, PAD purchased 80% of the common shares of SBC for $4,500,000. On that date, SBC had common shares of $1,250,000 and retained earnings of $3,000,000, and fair values were equal to carrying values for all its net assets except inventory that was overvalued $60,000, property, plant and equipment that was undervalued $120,000 (remaining useful life of 10 years), and note payable undervalued 5,000 (5 years to maturity) on SBC's books. The financial statements for PAD and SBC for the year ended December 31, Year 8 were as follows: Balance Sheets December 31, Year 8 PAD SBC Cash $ 680,000 $ 435,000 Accounts receivable 1,505,000 1,005,000 Note receivable 50,000 20,000 Inventory 2,800,000 1,790,000 Property, plant and equipment 4,676,000 3,500,000 Accumulated depreciation 1,000,000 500,000 Investment in SBC 4,500,000 Total assets $ 13,211,000 $ 6,250,000 Current liabilities $ 400,000 $ 255,000 Notes payable 5,251,000 1,185,000 Common shares 2,000,000 1,250,000 Retained earnings 5,560,000 3,560,000 Total $ 13,211,000 $ 6,250,000 453 2020 WT1 A3 Statements of Income and Retained Earnings For the year ended December 31, Year 8 PAD SBC Sales $ 3,800,000 $ 2,710,000 Cost of sales 1,600,000 1,140,000 Gross profit 2,200,000 1,570,000 Other income 240,000 40,000 Depreciation and amortization expense (480,000) (310,000) Other expenses (400,000) (180,000) Income tax expense (100,000) (70,000) Net income 1,460,000 1,050,000 Retained earnings, beginning 4,200,000 2,580,000 Dividends paid (100,000) (70,000) Retained earnings, end $ 5,560,000 $ 3,560,000 Additional information 1. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment was $220,000 in Year 6 and $60,000 in Year 8. 2. On July 2, Year 6, PAD sold a machine to SBC for $215,000. PAD had paid $250,000 for this machine on July 2, Year 1 and had been depreciating the machine on a straight-line basis over 10 years. There was no change in the estimated useful life of this machine or in the residual value of $20,000. 3. During December Year 8, PAD purchased merchandise from SBC for $510,000, of which PAD still owes SBC $180,000 at year-end. Of this merchandise, 35% was resold by PAD by December 31, Year 8. In December 31, Year 7, the inventories of PAD contained $120,000 of merchandise purchased from SBC. SBC earns a gross margin of 25% on its sales to PAD. 4. On January 1, Year 7, PAD lent SBC $10,000 due in 3 years and charges interest of 3%. 5. PAD accounts for its investment in SBC using the cost method. 6. Both companies pay income taxes at the rate of 40%. Required: show all schedules and work for full marks a) Prepare 3 schedules b) Calculate Consolidated Net Income for Year 8 c) Calculate Consolidated Retained Earnings January 1, Year 8 d) Prepare the Consolidated financial statements for Year 8 in good format e) Prepare the working paper journal entry(s) for the intercompany sale of inventory in Year 8 Hints: Goodwill = $1,320,000; Total AD remaining Dec 31, Year 8 = $1,111,000; Consolidated NI = $2,360,875; total consolidated assets = $15,809,275