The financial statements of Parco and Subco for the year ended December 31, 2020 are provided as follows: Balance Sheets December 31, 2020 Parco Subco Cash 680,000 435,000 Accounts receivable 1,505,000 1,005,000 Note receivable 50,000 20,000 Inventory 2,800,000 1,790,000 Property, plant and equipment 4,676,000 2,500,000 Accumulated depreciation 1,000,000 500,000 Investment in Subco 6,134,000 - Total assets 16,845,000 6,250,000 Current liabilities 400,000 255,000 Notes payable 7,800,000 1,185,000 Common shares 3,085,000 1,250,000 Retained earnings 5,560,000 3,560,000 Total liabilities and shareholders' equity 16,845,000 6,250,000

Income Statement December 31, 2020 Parco Subco Sales revenue 3,800,000 2,710,000 Cost of sales 1,600,000 1,140,000 Gross profit 2,200,000 1,570,000 Other income 240,000 40,000 Depreciation expense 480,000 310,000 Other expenses 400,000 180,000 Income before income tax expense 1,560,000 1,120,000 Income tax expense 100,000 70,000 Net income 1,460,000 1,050,000

The following schedules have been correctly prepared for the consolidation of parent company, Parco, and subsidiary company, Subco. 1. Acquisition differential Acquisition differential 1,360,000 Allocated to: Inventory 60,000 Equipment (100,000) Notes payable (10,000) (50,000) Goodwill 1,410,000

2. Acquisition differential amortization/impairment Dec. 31, 2017 2017- 2019 2020 Dec. 31, 2020 Inventory 60,000 (60,000) - - Equipment (10 years) (100,000) 20,000 10,000 (70,000) Notes payable (5 years) (10,000) 4,000 2,000 (4,000) Goodwill 1,410,000 (200,000) (50,000) 1,160,000 Total 1,360,000 (236,000) (38,000) 1,086,000

3. Intercompany profits/gains and losses Before Tax Tax After Tax Machine sold interco Parco to Subco, July 1, 2019 - Gain on sale 80,000 32,000 48,000 Excess depreciation 2019 8,000 3,200 4,800 Balance December 31, 2019 72,000 28,800 43,200 Excess depreciation 2020 16,000 6,400 9,600 Balance December 31, 2020 56,000 22,400 33,600 Gross profit on inventory sold Subco to Parco, in inventory December 31, 2019 25,000 10,000 15,000 Gross profit on inventory sold Subco to Parco, in inventory December 31, 2020 87,500 35,000 52,500

Additional information: Parco acquired 90% of the shares of Subco on December 31, 2017.

During December 2020, Parco purchased inventory from Subco for $500,000. Parco still owes Subco $200,000 relating to these goods as of December 31, 2020.

During 2020, Parco charged Subco $10,000 for management fees.

Consolidated net income for the period ended December 31, 2020 is $2,381,000. $2,283,650 is attributable to Parco and $97,450 is attributable to Subco.

Parco and Subco had opening retained earnings balances on January 1, 2020 of $4,200,000 and $2,580,000, respectively. Subcos retained earnings at acquisition was $3,000,000. During 2020, Subco paid dividends of $70,000 and Parco paid dividends of $100,000.

Parco accounts for its investment in Subco using the cost method.

The tax rate of both companies is 40%.

Instructions: a) Calculate consolidated retained earnings on January 1, 2020. b) Prepare the consolidated financial statements for 2020, including: Consolidated Income Statement Consolidated Statement of Changes in Retained Earnings Consolidated Balance Sheet