On January 1, Year 4, Par purchased 75% of the common shares of Sub for $4,200,000....

  
   

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On January 1, Year 4, Par purchased 75% of the common shares of Sub for $4,200,000. On that date, Sub had common shares of $1,000,000 and retained earnings of $2,300,000. The fair values were equal to carrying values for all its net assets except the following: Inventory carrying value was greater than the fair value by $120,000; property, plant and equipment carrying value was less than the fair value by $800,000 (remaining useful life of 8 years), and note payable carrying value was less than the fair value by 90,000 (8 years to maturity) on Sub's books. The financial statements for Par and Sub for the year ended December 31, Year 8 were as follows: Sales Cost of sales Gross profit Other income Statements of Income For the year ended December 31, Year 8 Par $5,000,000 3,200,000 1,800,000 410,000 700,000 740,000 340,000 430,000 Depreciation and amortization expense Other expenses Income tax expense Net income Sub $4,400,000 2,920,000 1,480,000 230,000 600,000 500,000 220,000 390,000 Statements of Retained Earnings For the year ended December 31, Year 8 4,000,000 430,000 (140,000) $4,290,000 Retained earnings, beginning Net income Dividends paid Retained earnings, end 3,300,000 390,000 (100,000) $3,590,000 Cash and Accounts receivable Note receivable Inventory *Property, plant and equipment Accumulated depreciation Investment in Sub Total assets *Includes land Current liabilities Notes payable Common shares Retained earnings Total Balance Sheets December 31, Year 8 Par $ 1,400,000 500,000 2,400,000 5,390,000 2,500,000 4,200,000 $ 11,390,000 $ 1,300,000 800,000 5,000,000 4,290,000 $ 11,390,000 Sub $ 1,100,000 450,000 1,600,000 3,690,000 1,150,000 $5,690,000 $ 600,000 500,000 1,000,000 3,590,000 $5,690,000 1. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment was $500,000 in Year 6 and the recoverable value of goodwill December 31, Year 8 was $800,000. 2. During December Year 8, Par purchased merchandise from Sub for $800,000. Of this merchandise, 65% was resold by Par by December 31, Year 8. In December 31, Year 7, the inventories of Par contained $410,000 of merchandise purchased from Sub. Sub earns a gross margin of 30% on its sales to Par. 3. On March 1, Year 6, Sub sold land to Par for $700,000. Sub purchased the land on January 1, Year 5 for $510,000. In Year 8, Par sold 60% of this land to an outsider. 4. During Year 8, Sub charged Par $40,000 for professional services of which $10,000 was owing at December 31, Year 8 5. On July 1, Year 7, Sub sold a machine to Par for $315,000. Sub had paid $340,000 for this machine on July 1, Year 5 and had been depreciating the machine on a straight-line basis over 8 years. 6. Par accounts for its investment in Sub using the cost method. Both companies pay income taxes at the rate of 25%. Required: Show all work and round to the nearest dollar a) Prepare all 3 schedules (8 marks) b) Calculate Consolidated Net Income for Year 8 (8 marks) c) Calculate Consolidated Retained Earnings January 1, Year 8 (6 marks) d) Prepare the 3 Consolidated financial statements for Year 8 in good format (41 marks) e) Prepare the working paper journal entry(s) for the intercompany sale of inventory in Year 8 (3 marks) Activate Win Hints: Goodwill = $1,710,000; AD left Dec. 31, Year 8= $1,066,250; Consolidated NI = $368,500; Total Consolidated assets $13,816,250 Go to Settings to On January 1, Year 4, Par purchased 75% of the common shares of Sub for $4,200,000. On that date, Sub had common shares of $1,000,000 and retained earnings of $2,300,000. The fair values were equal to carrying values for all its net assets except the following: Inventory carrying value was greater than the fair value by $120,000; property, plant and equipment carrying value was less than the fair value by $800,000 (remaining useful life of 8 years), and note payable carrying value was less than the fair value by 90,000 (8 years to maturity) on Sub's books. The financial statements for Par and Sub for the year ended December 31, Year 8 were as follows: Sales Cost of sales Gross profit Other income Statements of Income For the year ended December 31, Year 8 Par $5,000,000 3,200,000 1,800,000 410,000 700,000 740,000 340,000 430,000 Depreciation and amortization expense Other expenses Income tax expense Net income Sub $4,400,000 2,920,000 1,480,000 230,000 600,000 500,000 220,000 390,000 Statements of Retained Earnings For the year ended December 31, Year 8 4,000,000 430,000 (140,000) $4,290,000 Retained earnings, beginning Net income Dividends paid Retained earnings, end 3,300,000 390,000 (100,000) $3,590,000 Cash and Accounts receivable Note receivable Inventory *Property, plant and equipment Accumulated depreciation Investment in Sub Total assets *Includes land Current liabilities Notes payable Common shares Retained earnings Total Balance Sheets December 31, Year 8 Par $ 1,400,000 500,000 2,400,000 5,390,000 2,500,000 4,200,000 $ 11,390,000 $ 1,300,000 800,000 5,000,000 4,290,000 $ 11,390,000 Sub $ 1,100,000 450,000 1,600,000 3,690,000 1,150,000 $5,690,000 $ 600,000 500,000 1,000,000 3,590,000 $5,690,000 1. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment was $500,000 in Year 6 and the recoverable value of goodwill December 31, Year 8 was $800,000. 2. During December Year 8, Par purchased merchandise from Sub for $800,000. Of this merchandise, 65% was resold by Par by December 31, Year 8. In December 31, Year 7, the inventories of Par contained $410,000 of merchandise purchased from Sub. Sub earns a gross margin of 30% on its sales to Par. 3. On March 1, Year 6, Sub sold land to Par for $700,000. Sub purchased the land on January 1, Year 5 for $510,000. In Year 8, Par sold 60% of this land to an outsider. 4. During Year 8, Sub charged Par $40,000 for professional services of which $10,000 was owing at December 31, Year 8 5. On July 1, Year 7, Sub sold a machine to Par for $315,000. Sub had paid $340,000 for this machine on July 1, Year 5 and had been depreciating the machine on a straight-line basis over 8 years. 6. Par accounts for its investment in Sub using the cost method. Both companies pay income taxes at the rate of 25%. Required: Show all work and round to the nearest dollar a) Prepare all 3 schedules (8 marks) b) Calculate Consolidated Net Income for Year 8 (8 marks) c) Calculate Consolidated Retained Earnings January 1, Year 8 (6 marks) d) Prepare the 3 Consolidated financial statements for Year 8 in good format (41 marks) e) Prepare the working paper journal entry(s) for the intercompany sale of inventory in Year 8 (3 marks) Activate Win Hints: Goodwill = $1,710,000; AD left Dec. 31, Year 8= $1,066,250; Consolidated NI = $368,500; Total Consolidated assets $13,816,250 Go to Settings to

Answer rating: 100% (QA)

a Schedule 1 Goodwill Year 4 Purchase Price 4200000 Fair Value of Subs Net Assets 3500000 Goodwill 700000 Year 57 No change Year 8 Impairment Loss 500000 Recoverable Value 800000 Goodwill 1710000 Sche... View the full answer