STATEMENTS OF INCOME AND RETAINED EARNINGS

For year ended December $31,$ Year $9$

Additional Information

In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy's assets

and liabilities were equal to their carrying amounts, except for the following:

Both companies use FIFO to account for their inventory and the straight$-$line method for amortizing their property.

plant, and equipment. Dandy's equipment had a remaining useful life of $10$ years at the acquisition date.

Goodwill is not amortized on a systematic basis. However, each year, goodwill is evaluated to determine if

there has been a permanent impairment. It was determined that goodwill on the consolidated balance sheet

should be reported at its recoverable amount of $$1,300$ on December $31.$ Year $8,$ and $$1,110$ on December $31,$

Year $9.$

During Year $9,$ inventory sales from Dandy to Handy were $$5,900.$ Handy's inventories contained merchandise

purchased from Dandy for $$3,400$ at December $31,$ Year $8,$ and $$4,500$ at December $31,$ Year $9.$ Dandy earns a gross

margin of $50\%$ on its intercompany sales.

On January $1.$ Year $5.$ Handy sold some equipment to Dandy for $$3,000$ and recorded a gain of $$360$ before taxes.

This equipment had a remaining useful life of eight years at the time of the purchase by Dandy.

Handy charges $$50$ per month to Dandy for consulting services and has been doing so throughout Years $8$ and $9.$

Handy uses the cost method of accounting for its long$-$term investment.

Both companies pay taxes at the rate of $40\%.$

Amortization expense is grouped with selling and administrative expenses, and impairment losses are grouped with

other expenses.

Required

$($a$)$ Prepare a consolidated statement of income for the year ended December $31,$ Year $9.$ Show supporting calculations.

$($b$)$ Calculate consolidated retained earnings at January $1.$ Year $9,$ and then prepare a consolidated statement of retained

earnings for the year ended December $31.$ Year $9.$ Show supporting calculations.

CHAPTER $7($A$)$ Intercompany Profits in Depreciable Assets $($B$)$ Intercompany Bondholdings

$($c$)$ Explain how the historical cost principle supports the adjustments made on consolidation when there has been an

intercompany sale of equipment.

$($d$)$ Calculate goodwill impairment loss and noncontrolling interest on the consolidated income statement for the year

ended December $31.$ Year $9,$ under the identifiable net assets method.

$($e$)$ Prepare the consolidated financial statements using the worksheet approach. $e/$ceIOn January $1,$ Year $4,$ Handy Company $($Handy$)$ purchased $70\%$ of the outstanding common shares of Dandy Limited

$($Dandy$)$ for $$13,300.$ On that date, Dandy's shareholders' equity consisted of common shares of $$1,250$ and retained

earnings of $$6,500.$

The financial statements for Handy and Dandy for Year $9$ were as follows:

BALANCE SHEETS

At December $31,$ Year $9$

IAPTER $7($A$)$ Intercompany Profits in Depreciable Assets $($B$)$ Intercompany Bondholdings

STATEMENTS OF INCOME AND RETAINED EARNINGS

For year ended December $31.$ Year $9$

Sales

Cost of sales

Gross profit

Other revenue

Selling and administrative expenses

Other expenses

Income before income taxes

Income tax expense

Net income

Retained earnings, beginning of year

Dividends paid

Retained earnings, end of year