Anita Company owns a controlling interest in Brian Company and Gabriel Company. Anita purchased an 80% interest in Brian at a time when Brian reported retained earnings of $ 450,000. Anita purchased a 60% interest in Gabriel at a time when Gabriel reported retained earnings of $ 100,000. In each acquisition, the purchase price was equal to the proportionate net carrying value of the acquired company€™s shares and the fair values of the assets and liabilities approximated their carrying values. An analysis of the changes in retained earnings of the three companies during the year 20X5 gives the following results:

Gabriel sells some raw materials to Anita. After further processing and assembly, these parts are sold by Anita to Brian where they become a part of the finished products sold by Brian. Intercompany profits included in inventories at the beginning and end of the current year are estimated as follows:

Brian also rents a building to Gabriel. Gabriel is paying $ 5,000 per month according to the lease contract. Anita carries its investments on a cost basis. Ignore the impact of income taxes.

Required
1. Compute the consolidated net income for 20X5.
2. Prepare the retained earnings section of the statement of changes in equity for 20X5.
3. What change would there be in consolidated net income if the three companies had engaged in the same transactions, but all purchases, sales, and lending had been with firms outside the affiliated group? Give the amount of the difference and explain how it isderived.

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Retained eamings, January 1, 20X5 Net income for the year Dividends paid Anita Companyr Company Gabriel Company $686,000 348,000 (200,000) 742,000 550,000 (250,000) $475,000 310,000 (150,000) Retained eamings, December 31, 20X5 $1042000 834,000635,000 January 1, 20x5 Inventory $70,000 60,000 December 31 20x5 Inventory 650,000 80,000 Intercompany profit included on sales from Gabriel to Anita On sales from Anita to Brian