Question

9.On January 1, Year 4, Grant Corporation bought 4,000 (80%) of the outstanding common shares of Lee Company for $35,000 cash. Lee’s shares were trading for $7 per share on the date of acquisition. On that date, Lee had $12,500 of common shares outstanding and $15,000 retained earnings. Also on that date, the carrying amount of each of Lee’s identifiable assets and liabilities was equal to its fair value except for the following:

	Carrying Amount			Fair Value
Inventory	$	25,000		$	27,500
Patent		5,000			10,000

The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was sold during Year 4. Grant uses the cost method to account for its investment.

The following are the separate-entity financial statements of Grant and Lee as at December 31, Year 7:

BALANCE SHEETS
At December 31, Year 7
		Grant			Lee
Assets
Cash	$	2,500		$	9,000
Accounts receivable		92,500			41,000
Inventory		155,000			50,000
Investment in Lee		35,000
Equipment, net		115,000			102,500
Patent, net					1,000
	$	400,000		$	203,500
Liabilities and Shareholders’ Equity
Accounts payable	$	95,000		$	97,500
Other accrued liabilities		30,000			25,000
Income taxes payable		40,000			36,000
Common shares		85,000			12,500
Retained earnings		150,000			32,500
	$	400,000		$	203,500

INCOME STATEMENT
Year ended December 31, Year 7
		Grant				Lee
Sales	$	450,000			$	180,000
Cost of goods sold		(170,000	)			(120,000	)
Gross margin		280,000				60,000
Distribution expense		(15,000	)			(12,500	)
Other expenses		(90,000	)			(28,000	)
Income tax expense		(60,000	)			(8,000	)
Net income	$	115,000			$	11,500

Additional Information

• The recoverable amount for goodwill was determined to be $5,000 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.
• Grant’s accounts receivable contains $15,000 owing from Lee.
• Amortization expense is grouped with distribution expenses and impairment losses are grouped with other expenses.

Required:

(a) Calculate consolidated retained earnings at December 31, Year 7. (Input all values as positive numbers. Omit $ sign in your response.)

Calculation of consolidated retained earnings – Dec 31, Year 7
Retained earnings – Grant			$
Retained earnings – Lee	$
Retained earnings on acquisition
Increase	$
Grant's share		%
Less: Changes to acquisition differential
			$

(b) Prepare consolidated financial statements for Year 7. (Input all values as positive numbers.)

Answer 1