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:
Statements of Income
For the year ended December 31, Year 8
Par Sub
Sales $ 5,000,000 $ 4,400,000
Cost of sales 3,200,000 2,920,000
Gross profit 1,800,000 1,480,000
Other income 410,000 230,000
Administration expense 100,000 110,000
Depreciation and amortization expense 700,000 500,000
Other expenses 640,000 490,000
Income tax expense 340,000 220,000
Net income 430,000 390,000

Statements of Retained Earnings

For the year ended December 31, Year 8
Retained earnings, beginning 4,000,000 3,300,000
Net income 430,000 390,000
Dividends paid (140,000) (100,000)
Retained earnings, end $ 4,290,000 $ 3,590,000

Balance Sheets
December 31, Year 8
Par Sub
Current assets $ 1,400,000 $ 1,100,000
Note receivable 500,000 450,000
Inventory 2,400,000 1,600,000
*Property, plant and equipment 5,390,000 3,690,000
Accumulated depreciation 2,500,000 1,150,000
Investment in Sub 4,200,000 -----
Total assets $ 11,390,000 $ 5,690,000
*Includes land
Current liabilities $ 1,300,000 $ 600,000
Notes payable 800,000 500,000
Common shares 5,000,000 1,000,000
Retained earnings 4,290,000 3,590,000
Total $ 11,390,000 $ 5,690,000
453 2023W1 A3

Additional information

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 $30,000 for professional services of which $12,000 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
b) Calculate Consolidated Net Income for Year 8
c) Calculate Consolidated Retained Earnings January 1, Year 8
d) Prepare the 3 Consolidated financial statements for Year 8 in good format
e) Prepare the working paper journal entry(s) for the intercompany sale of inventory in Year
8

Hints: Goodwill = $1,710,000; AD left Dec. 31, Year 8 = $1,066,250; Consolidated NI =

$368,500; Total Consolidated assets $13,814,250

Note: there are 2 separate lines for Equipment less accumulated depreciation on Cons B/S
hence do not show a net number.

Notes
• Only 4 columns for AD amort./loss schedule (in proper sequence)
• Good format so include proper title with proper dates
• All calculations must be shown (i.e. for NCI, Cons. RE, etc)
• All words on the consolidated FSs must be written out fully
• All #s must be given in brackets on Cons. Statements along with totals
• If using excel, answer the question in one sheet/tab only so markers can follow the
references