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Problem 8-2

Financial statements of Par Corp. and its subsidiary Star Inc. on December 31, Year 12, are shown below:
BALANCE SHEETS
At December 31, Year 12
                                                                 Par                          Star
Cash                                                       $ 57,000                  $ 2,700
Accounts receivable                                 117,000                  102,000
Inventories                                                84,360                    65,000
Land                                                          47,000                     87,000
Plant and equipment                               520,000                   870,000
Accumulated depreciation                     (197,000)                 (317,000)
Investment in Star common shares         232,400                        —
                                                               $860,760                   $809,700

Accounts payable                                  $ 98,800                     $197,000
Accrued liabilities                                        9,700                         13,400
Preferred shares                                            —                           67,000
Common shares                                      450,000                       180,000
Retained earnings                                   302,260                       352,300
                                                                 $860,760                       $809,700

RETAINED EARNINGS STATEMENTS
for the year ended December 31, Year 12
                                                Par                  Star
Balance, January 1       $297,260            $417,300
Net income (loss)              31,000              (28,000)
                                           328,260             389,300
Dividends                           26,000                37,000
Balance, December 31 $302,260           $352,300

Other Information
• On January 1, Year 5, the balance sheet of Star showed the following shareholders’ equity:
$8 cumulative preferred shares, 500 shares issued $ 67,000
Common shares, 2,000 shares issued                          180,000
Deficit (Note 1)                                                                   (97,000)
                                                                                          $150,000
Note 1: Dividends on preferred shares are two years in arrears.
On this date, Par acquired 1,400 common shares of Star for a cash payment of $232,400.
The fair values of Star’s identifiable net assets differed from carrying amounts only with respect to the following:
                                    Carrying Amount     Fair Value
Accounts receivable      $51,000                   $49,000
Inventory                          61,000                    68,000
Plant                               580,000                    630,000
Long-term liabilities         332,000                  352,000

The plant had an estimated remaining useful life of five years on this date, and the long-term liabilities had a maturity date of December 30, Year 12. Any goodwill is to be tested annually for impairment.
• Both Par and Star make substantial sales to each other at an intercompany selling price that yields the same gross profit as the sales they make to unrelated customers. Intercompany sales in Year 12 were as follows:
Par to Star $360,000
Star to Par 381,000
• During Year 12, Par billed Star $2,000 per month in management fees. At year-end, Star had paid for all months except for December.
• The January 1, Year 12, inventories of the two companies contained unrealized intercompany profits as follows:
Inventory of Par $31,000
Inventory of Star 30,000
• The December 31, Year 12, inventories of the two companies contained unrealized intercompany profits as follows:
Inventory of Par $52,000
Inventory of Star 54,000
• On July 1, Year 7, Star sold equipment to Par for $76,000. The equipment had a carrying amount in the records of Star of $56,000 on this date and an estimated remaining useful life of five years.
• Goodwill impairment losses were recorded as follows: Year 7, $83,000; Year 9, $51,570; and Year 12, $20,560.
• Assume a 40% corporate tax rate.
• Par has accounted for its investment in Star by the cost method.
• All dividends in arrears were paid by December 31, Year 11.
Required
(a) Prepare, with all necessary calculations, the following:
(i) Year 12 consolidated retained earnings statement
(ii) Consolidated balance sheet as at December 31, Year 12