On January 2, Year 4, Poplar Ltd. purchased 80% of the outstanding shares of Spruce Ltd. for

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Question:

On January 2, Year 4, Poplar Ltd. purchased 80% of the outstanding shares of Spruce Ltd. for $1,950,000. At that date, Spruce had common shares of $500,000 and retained earnings of $1,200,000 and accumulated depreciation of $550,000. Poplar acquired the Spruce shares to obtain control of mineral rights owned by Spruce. At the date of acquisition, these mineral rights were valued at $737,500, were not recognized on Spruce’s separate-entity balance sheet, and had an useful life of 10 years. Except for the mineral rights, the carrying amount of the recorded assets and liabilities of Spruce were equal to their fair values. On December 31, Year 7, the trial balances of the two companies were as follows:

Cash	$	950,000	$	515,000
Accounts receivable		1,900,000		306,000
Inventory		2,850,000		1,956,000
Plant and equipment		13,300,000		2,850,000
Investment in Spruce (cost)		1,950,000		—
Investment in bonds		—		503,000
Cost of goods sold		2,350,000		875,500
Other expenses		967,000		315,000
Interest expense		43,000		—
Income tax expense		679,000		300,000
Dividends		600,000		250,000
	$	25,589,000	$	7,870,500
Accounts payable	$	2,442,000	$	2,428,500
Accumulated depreciation: plant and equipment		3,920,000		950,000
Bonds payable		500,000		—
Premium on bonds payable		8,000		—
Common shares		4,500,000		500,000
Retained earnings, January 1		9,169,000		2,005,500
Sales		4,850,000		1,950,000
Dividend revenue		200,000		—
Interest revenue		—		36,500
	$	25,589,000	$	7,870,500

Additional Information

The Year 7 net incomes of the two companies are as follows:


Poplar Ltd.	$	978,000
Spruce Ltd.		529,000

The mineral rights owned by Spruce have increased in value since the date of acquisition and were worth $938,500 at December 31, Year 7.
On January 2, Year 5, Poplar sold equipment to Spruce for $460,000. The equipment had a carrying amount of $368,000 at the time of the sale. The remaining useful life of the equipment was 5 years.
The Year 7 opening inventories of Poplar contained $515,000 of merchandise purchased from Spruce during Year 6. Spruce had recorded a gross profit of $206,000 on this merchandise.
During Year 7, Spruce’s sales to Poplar totalled $1,015,000. These sales were made at a gross profit rate of 35%.
Poplar’s ending inventory contains $315,000 of merchandise purchased from Spruce.
Other expenses include depreciation expense.
Tax allocation will be at a rate of 40%.

Required:

(a) Prepare the following consolidated financial statements for Year 7:

Required:

(a) Prepare the following consolidated financial statements for Year 7:

(i) Income statement (Input all values as positive numbers.)

(ii) Retained earnings statement (Input all values as positive numbers. Omit $ sign in your response.)

Poplar Ltd.
Consolidated Statement of Retained Earnings
Year 7
	$



	$

(iii) Balance sheet (Amounts to be deducted should be indicated with a minus sign.)

(b) Calculate the December 31, Year 7, balance in the account Investment in Spruce if Poplar had used the equity method to account for its investment. (Omit $ sign in your response.)

Balance, Dec. 31, Year 7 $