Calculate consolidated retained earnings at December

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Reference no: EM132793305

Problem - On January 1, Year 4, Grant Corporation bought 12,000 (80%) of the outstanding common shares of Lee Company for $105,000 cash. Lee's shares were trading for $7 per share on the date of acquisition. On that date, Lee had $37,500 of common shares outstanding and $45,000 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

$75,000

$82,500

Patent

15,000

30,000

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

$7,500

$27,000

Accounts receivable

277,500

123,000

Inventory

465,000

150,000

Investment in Lee

105,000

 

Equipment, net

345,000

307,500

Patent, net

 

3,000

 

$1,200,000

$610,500

Liabilities and Shareholders' Equity

 

 

Accounts payable

$285,000

$292,500

Other accrued liabilities

90,000

75,000

Income taxes payable

120,000

108,000

Common shares

255, 000

37,500

Retained earnings

450,000

97,500

 

$1,200,000

$610,500

Additional Information:

The recoverable amount for goodwill was determined to be $15,000 on December 31, Year 7. The goodwill impairment loss occurred in Year 7.

Corner's accounts receivable contains $45,000 owing from Brook.

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.

(b) Prepare consolidated financial statements (Income Statement & Balance Sheet) for Year 7.

Reference no: EM132793305

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