Step 1 Analyze the purchase price and determine the goodwill amount: While not specifically requested, we must calculate the goodwill at acquisition to complete the requirements. Purchase price Less the carrying value at acquisition: 290,000 Common shares 119,000 Retained earnings 102,340 Acquisition differential 68,660 Allocated to: Inventory ($32,130 $41,650) (9,520) Land ($41,540 $80,000) (38,350) Equipment ($59,500 $69,400) (9,900) Goodwill $10,890 Step 2 Prepare an amortization schedule for the fair value differentials Account Fair value differentials at acquisition Amortization for 2021, 2022,2023, 2024 Unamortized balance at end of 2024 Amortization 2025 Unamortized balance at end of 2025 Inventory $9,520 $(9,520) Land 38,350 $38,350 $(38,350) Equipment 9,900 (4,950) 4,950 (1,238) $3,712 Goodwill 10,890 10,890 10,890 $68,660 $(14,470) $54,190 $(39,588) $14,602 Step 3 Gather information on intercompany transactions: Dividends paid by the subsidiary to the parent $50,000 a. Prepare a calculation of opening consolidated retained earnings as of January 1, 2025. Parent's retained earnings, January 1, 2025 $578,836 Subsidiary's retained earnings, January 1, 2025 $556,820 Less subsidiary's retained earnings at acquisition 102,340 Change in subsidiary's retained earnings since acquisition 454,480 Adjust for: Fair value amortizations to January 1, 2025 (14,470) Subsidiary's adjusted change in retained earnings to January 1, 2025 440,010 Percentage belonging to the parent 100% 440,010 Consolidated retained earnings at January 1, 2025 $1,018,846 b. Prepare a calculation of consolidated net income for the year ended December 31, 2025. Parent's net income for the year ending December 31, 2025 $65,664 Less dividends declared by the subsidiary (50,000) Parent's adjusted net income Subsidiary's net income for the year ending December 31, 2025 $32,156 15,664 Adjust for the fair value amortizations for 2025 (39,588) Subsidiary's adjusted net income (loss), 2025 $(7,342) (7,432) Consolidated entity's net income $8,232 Note: Since the parent owns 100% of the shares of the subsidiary, all of the entity's net income belongs to the parent. In calculating the opening consolidated retained earnings as of January 1, 2025, there is an adjustment (reduction) of $102,340. Discuss why we need this adjustment? What is the rationale for this adjustment