The financial statements of Pa and Son as at December 31, Year 6 are shown below: Additional information: 1. Pa acquired 80% of Son's common shares on January 1, Year 1 for $170,000. At that date, Son's reported a retained earnings balance of $20,000 and common shares $125,000. On that dated, Son's net assets were equal to fair market value with the exception of the following: Fair Value $ 60,000 $240,000 $ 12,000 Balance Sheets At December 31, Year 6 Pa Son Carrying Value. $ 50,000 $260,000 $ 10.000 Assets Cash Receivables 16,800 21,000 14,000 Inventory Equipment (10 years useful life remaining) Land Inventory Land Property, plant and equipment Accumulated depreciation Other assets 25,000 45,000 20,000 175,000 35,000 59,600 50,000 10,000 2. Annual impairment tests of goodwill resulting in losses of $8,000 in Year 3. At December 31, Year 6, the recoverable value of goodwill was $65,000. 3. Pa uses the cost method. 4. Assume a 40% corporate tax rate. 5. Son's sales during Year 6 include $70,000 of sales to Pa. Goods purchased from Son and included in Pa's inventories were $50,000 at the end of Year 5 and $30,000 at the end of Year 6. Son's gross profit margin to Pa is 30%. 6. During Year 6, Pa sold inventory that it had purchased for $80,000 to Son for $100,000. 35% of this inventory was resold by Son by December 31, Year 6. 7. On April 1, Year 6, Pa sold machinery to Son for $40,000. The carrying value of the machinery at the date of sale was $48,000. The remaining useful life of the machinery on that date was 4 250,000 40,000 Investment in Son 170,000 473.600 307,800 Liabilities and Shareholders' equity Current liabilities 36,400 Long-term liabilities Common shares Retained earnings 350,000 87,200 $ 473.600 37,800 102,500 125,000 42.500 307.800 years. 8. On January 1, Year 4, Son sold a building to Pa for $60,000. Son had purchased the building on January 1, Year 1 for $80,000 and it had an estimated 8 year life on that date with no salvage value. 9. On March 1, Year 6, Son borrowed $10,000 from Pa. The one-year note had interest rate of 6%. Both the principal and interest were payable at maturity. Statements of Retained Earnings For the year ended December 31, Year 6 Pa Son Retained earnings, Jan 1 Net income 77,600 34,600 25,000 87.200 25,000 29,500 12,000 $42.500 Required: 1. (a) Prepare the calculation and allocation of acquisition differential schedule and the acquisition differential amortization and goodwill impairment schedule (4 marks) (b) Prepare the intercompany profits, gains and losses schedule (4 marks) (c) Prepare the calculation of consolidated net income for Year 6 (11.5 marks) (d) Prepare the calculation of consolidated retained earnings at Jan. 1, Year 6 (5 marks) (e) Prepare in good form the following for Year 6: a. Consolidated income statement (24 marks) b. Consolidated retained earnings statement (2 marks) c. Consolidated balance sheet (28.5 marks) Dividends Retained earnings Income Statements For the year ended December 31, Year 6 Pa Son Sales revenue Other income $ 270,000 $ 430,200 42,400 350,000 18,000 57,000 173 000 2. Prepare the working paper eliminating journal entries for the inter-company sale of the machinery in Year 6 (3 marks) Cost of goods sold Depreciation & amortization expense General and administration expenses Interest expense 28,000 19,000 9,500 11,000 29,500 Income taxes expense 13,000 Net income 34,600