The balance sheets of Forest Company and Garden Company are presented below as at December 31, Year 8. BALANCE SHEETS At December 31, Year 8 Forest Garden Cash $ 13.000 $ 48,800 Receivables 25,000 86,674 Inventories 80,000 62,000 Investment in shares of Garden 207,900 Plant and equipment 740,000 460,000 Accumulated depreciation (625,900) (348,400) Patents 4,500 Investment in bonds of Forest 58.426 $440,000 $372,000 Current liabilities $ 59,154 $ 53,000 Dividends payable 6,000 30,000 Bonds payable 6% 94,846 Common shares 200,000 150,000 Retained earnings 80.000 139,000 $440,000 $372,000 Additional Information Forest acquired 90% of Garden for $207,900 on July 1, Year 1, and accounts for its investment under the cost method. At that time, the shareholders' equity of Garden amounted to $175,000, the accumulated amortization was $95,000, and the assets of Garden were undervalued by the following amounts: Inventory $12.000 Buildings $10,000 Remaining life, 10 years Patents $ 16,000 Remaining life, 8 years . . During Year 8, Forest reported net income of $41,000 and declared dividends of $25,000, whereas Garden reported net income of $63,000 and declared dividends of $50,000. During Years 2 to 7, goodwill impairment losses totalled $1,950. An impairment test conducted in Year 8 indicated a further loss of $7,150. Forest sells goods to Garden on a regular basis at a gross profit of 30%. During Year 8, these sales totalled $150,000. On January 1, Year 8, the inventory of Garden contained goods purchased from Forest amounting to $18,000, while the December 31, Year 8, inventory contained goods purchased from Forest amounting to $22,000. On August 1, Year 6, Garden sold land to Forest at a profit of $18,000. During Year 8, Forest sold one-quarter of the land to an Page 417 unrelated company. Forest's bonds have a par value of $100,000, pay interest annually on December 31 at a stated rate of 6%, and mature on December 31, Year 11. Forest incurs an effective interest cost of 8% on these bonds. They had a carrying amount of $93,376 on January 1, Year 8. On that date, Garden acquired $60,000 of these bonds on the open market at a cost of $57,968. Garden will earn an effective rate of return of 7% on them. Both companies use the effective-interest method to account for their bonds. The Year 8 income statements of the two companies show the following with respect to bond interest. Forest Garden Interest expense $7,470 Interest revenue $4,058 Garden owes Forest $22,000 on open account on December 31, Year 8. Assume a 40% corporate tax rate and allocate bond gains (losses) between the two companies. a Required (a) Prepare the following statements: (i) Consolidated balance sheet (ii) Consolidated retained earnings statement (b) Prepare the Year 8 journal entries that would be made on the books of Forest if the equity method was used to account for the investment. (c) Explain how a loss on the elimination of intercompany bondholdings is viewed as a temporary difference and gives rise to a deferred income tax asset. a