On January 2
On January 2, Year 1, Road Ltd. acquired 70% of the outstanding voting shares of Runner Ltd. The acquisition differential of $240,000 on that date was allocated in the following manner:
| Inventory | $ | 90,000 | ||
| Land | 40,000 | |||
| Plant and equipment | 50,000 | estimated life, 5 years | ||
| Patent | 40,000 | estimated life, 8 years | ||
| Goodwill | 20,000 | |||
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| $ | 240,000 | |||
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The Year 5 income statements for the two companies were as follows: |
| Road | Runner | ||||
| Sales | $ | 3,900,000 | $ | 2,090,000 | |
| Intercompany investment income | 203,000 | – | |||
| Rental revenue | – | 50,000 | |||
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| Total income | 4,103,000 | 2,140,000 | |||
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| Materials used in manufacturing | 1,950,000 | 790,000 | |||
| Changes in work-in-progress and finished goods inventory | 35,000 | (30,000) | |||
| Employee benefits | 540,000 | 470,000 | |||
| Interest expense | 240,000 | 130,000 | |||
| Depreciation | 395,000 | 240,000 | |||
| Patent amortization | – | 20,000 | |||
| Rental expense | 25,000 | – | |||
| Income tax | 290,000 | 221,000 | |||
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| Total expenses | 3,475,000 | 1,841,000 | |||
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| Profit | $ | 628,000 | $ | 299,000 | |
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Additional Information
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Runner regularly sells raw materials to Road. Intercompany sales in Year 5 totalled $410,000. |
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Intercompany profits in the inventories of Road were as follows: |
| January 1, Year 5 | $ 135,000 |
| December 31, Year 5 | 120,000 |
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Road’s entire rental expense relates to equipment rented from Runner. |
| • | A goodwill impairment loss of $3,000 occurred in Year 5. |
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Retained earnings at December 31, Year 5, for Road and Runner were $2,525,600 and $1,140,000, respectively. |
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Road uses the equity method to account for its investment, and uses income tax allocation at the rate of 40% when it prepares consolidated statements. |
Required:
| (a) |
Prepare a consolidated income statement for Year 5 with expenses classified by nature. (Input all amounts as positive number except change in work-in-progress and finished goods inventory which should be indicated by minus sign.) |
| Road Ltd. | ||
| Consolidated Income Statement | ||
| for the Year Ended December 31, Year 5 | ||
| Sales | $ | |
| Rental revenue | ||
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| Total income | ||
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| Materials used in manufacturing | ||
| Change in work-in-progress and finished goods inventory | ||
| Employee benefits | ||
| Interest expense | ||
| Depreciation | ||
| Patent amortization | ||
| Goodwill impairment loss | ||
| Income tax | ||
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| Total expenses | ||
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| Profit | $ | |
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| Attributable to: | ||
| Shareholders of Road | ||
| Non-controlling interests | ||
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| $ | ||
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| (b) |
Calculate consolidated retained earnings at December 31, Year 5. |
| Consolidated retained earnings | $ |
