Your friend is a financial analyst whose accounting knowledge is virtually nonexistent. Your friend believes that financial analysts take companies financial statements at face value, disregarding in their analysis the implications of the consolidation-related adjustments and managements accounting choices in preparing the companys consolidated statements. Given your strong advanced accounting background, you find this purported practice naive to say the least. Recently, you met with your friend over coffee and the conversation slowly drifted to his work. He indicated that he had been following the performance of International Consolidators Inc. (ICI). ICI had acquired 80% of the shares of Prime Target Inc. (PTI) on December 31, 20X5, for $3,220,000 by issuing shares. PTI appeared to be an ideal acquisition given that its return on year-end equity was 20.42% for 20X5. The return on equity for ICI on the same basis for 20X5 was 10.69%. The statement of financial position of PTI on December 31, 20X5, the fair values of its identifiable assets and liabilities, and their future useful lives, where applicable, were as shown in Exhibit A : Chapter 6 Subsequent-Year Consolidations: General Approach 333 Case Continued > Exhibit B International Consolidators Inc. Consolidated Statement of Comprehensive Income Year Ended December 31, 20X7

Sales revenue $6,668,220 COGS (2,652,796) Gross profit 4,015,424 Dividend income $ 0 Amortization expense (365,000) Administrative & interest expenses (1,109,404) Selling & marketing expenses (1,643,530) Loss on goodwill impairment (300,000) Income tax expense (209,098) Net income and comprehensive income $ 388,392 Allocated to: Shareholders of ICI $ 427,125 Non-controlling interest $ (38,733) Consolidated Statement of Changes in EquityRetained Earnings Section December 31, 20X7 Retained earnings, beginning of year $1,386,732 Net income attributable to shareholders of ICI 427,125 Dividends for the year (200,000) Retained earnings, end of year $1,613,857 Consolidated Statement of Financial Position December 31, 20X7 Assets Cash $ 515,202 Inventory 252,000 Accounts receivable 555,000 Buildings 2,100,000 Accumulated depreciationbuildings (990,000) Plant & equipment 2,700,000 Accumulated depreciationplant & equipment (1,540,000) Land 3,250,000 Patents 600,000 Investment in Prime Target Inc. 0 Goodwill TOTAL ASSETS $7,617,202 334 Chapter 6 Subsequent-Year Consolidations: General Approach Liabilities & owners equity Accounts payable $ 422,510 Long-term debt 655,000 Contributed capital 4,220,000 Retained earnings 1,613,857 NCI 705,835 TOTAL LIABILITIES & OWNERS EQUITY $7,617,202 Prime Target Inc. Statement of Comprehensive Income Year Ended December 31, 20X7 Revenue $3,749,200 Cost of goods sold (2,361,996) Gross profit 1,387,204 Amortization expense (50,000) Administrative & interest expenses (412,412) Selling & marketing expenses (612,500) Income tax expense (62,45 Net income and comprehensive income $ 249,834 Statement of Financial Position December 31, 20X7 Assets Cash $ 252,184 Inventory 80,000 Accounts receivable 225,000 Buildings 500,000 Accumulated depreciationbuildings (340,000) Plant & equipment 600,000 Accumulated depreciationplant & equipment (360,000) Land 800,000 TOTAL ASSETS $1,757,184 Liabilities & owners equity Accounts payable $172,510 Long-term debt 175,000 Contributed capital 500,000 Retained earnings 909,674 TOTAL LIABILITIES & OWNERS EQUITY $1,757,184 Chapter 6 Subsequent-Year Consolidations: General Approach 335 Exhibit C ADDITIONAL INFORMATION On December 31, 20X5, the net identifiable assets of ICI had a fair value that was $2,275,000 greater than their net carrying value. Upstream sales from PTI to ICI during 20X7 = $1,499,680. Downstream sales from ICI to PTI during 20X7 = $1,472,900. PTI (subsidiary) declared and paid dividends of $50,000 in 20X6 and $60,000 in 20X7. ICI (parent) declared and paid dividends of $150,000 in 20X6 and $200,000 in 20X7. Inventory purchased from PTI (subsidiary) in ICIs (parent) 20X7 beginning inventory = $100,000. Inventory purchased from PTI (subsidiary) in ICIs (parent) 20X7 ending inventory = $150,000. PTI sold goods at the same gross profit percentage in both 20X6 and 20X7. Inventory purchased from ICI (parent) in PTIs 20X7 beginning inventory = $40,000. Inventory purchased from ICI (parent) in PTIs (subsidiary) 20X7 ending inventory = $50,000. ICI sold goods at the same gross profit percentage of 45% in both 20X6 and 20X7. On January 1, 20X6, PTI sold plant & equipment that on that date had an original cost of $200,000 and carrying value of $100,000 to ICI for $200,000. The plant & equipment also had a future useful life of 10 years on January 1, 20X6. PTI (subsidiary) purchased additional land from an outside party for $300,000 on January 1, 20X7. Due to impairment in 20X7, the value of goodwill relating to the purchase of PTI was worth $175,000 on December 31, 20X7. PTI is the sole subsidiary of ICI. Neither company purchased or sold any other buildings, plant and equipment, or land, or issued additional shares since ICI purchased its controlling interest in PTI. When ICI had acquired its controlling interest in PTI on December 31, 20X5, ICI management had touted the potential synergies between the two companies. It is now the end of 20X7, and your friend is clearly disappointed by the financial results presented in the consolidated financial statements issued by ICI under IFRS for 20X7. Your friend does not see the result of any synergy between the two companies in the consolidated financial statements, as provided in Exhibit B . He notes that the return on total year-end equity is an unimpressive 5.94%. You gently point out to him that he is disregarding the impact of accounting, especially consolidation-related accounting, on these numbers. To this your friend counters, Fair enough. Id like for you to show me just what Im overlooking. Here are the separate-entity financial statements of PTI for 20X7 and some other information that Ive been able to gather about the two companies [ Exhibit C ]. Would you mind preparing the separate-entity financial statements of ICI 336 Chapter 6 Subsequent-Year Consolidations: General Approach (SCI, SFP, and statement of changes in equityretained earnings section) under the cost method for 20X7 based on the information provided? Id like to understand how the consolidation process affects ICIs financial results. Can you also give me some guidance as to the true economic operating results and financial position of the two companies?