Question $3(15$ points$)$

VD $-$ On December $31,$ Year $5,$ P Company purchased $70\%$ of the outstanding

common shares of the $5$ Company for $$5\mathrm{.}6$ million in cash when S$\text{'}$s shareholders

equity consisted of $$2,000,000$ of common shares and $$6,000,000$ of retained

earnings. There was no acquisition differential. For the year ending December $31,$

Year $10,$ the income statements for $P$ and $S$ were as follows:

At December $31,$ Year $10,$ the condensed balance sheets for the two companies were

as follows:

At December $31,$ Year $10,$ the condensed balance sheets for the two companies were

as follows:

OTHER INFORMATION:

During Year $10,P$ sold merchandise to $S$ for $$600,000.$ Seventy$-$five percent of

this merchandise remains in S$\text{'}$s inventory at December $31,$ Year $10.$ On

December $31,$ Year $9,$ the inventory of $S$ contained $$100,000$ of merchandise

purchased from P$.$ P earns a gross margin of $30\%$ on its intercompany sales.

On January $2,$ Year $8,$ S sold land to P for $$1,200,000.$ S purchased the land on

January $1,$ Year $6,$ for $$1,100,000.$ P still owns this land at December $31,$ Year

During Year $10,P$ declared and paid dividends of $$2,600,000,$ while $S$ declared

and paid dividends of $$800,000.$

$P$ accounts for its investment in $S$ using the cost method.

Both companies pay income tax at the rate of $35\%.$

Required:

a$)$ Prepare a schedule to show the calculation of consolidated net income. Include

attribution to both shareholder groups. $(5$ marks$)$

b$)$ Prepare an intercompany profit analysis to show intercompany transaction

schedule of profits before and after tax as well as the tax effects. $(7$ marks$)$

c$)$ Calculate consolidated retained earnings at December $31,$ Year $10.$ Show

supporting calculations. $(3$ marks$)$