Question: On January 2, Year 5, Road Ltd.
On January 2, Year 5, Road Ltd. acquired 70% of the outstanding voting shares of Runner Ltd. The acquisition differential of $520,000 on that date was allocated in the following manner:
The Year 9 income statements for the two companies were as follows:
Additional Information
• Runner regularly sells raw materials to Road. Intercompany sales in Year 9 totaled $480,000.
• Intercompany profits in the inventories of Road were as follows:
• Road's entire rental expense relates to equipment rented from Runner.
• A goodwill impairment loss of $3,000 occurred in Year 9.
• Retained earnings at December 31, Year 9, for Road and Runner were $2,523,300 and $1,210,000, respectively.
• 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 9 with expenses classified by nature.
(b) Calculate consolidated retained earnings at December 31, Year 9.
(c) If Road had used parent company extension theory rather than entity theory, how would this affect the return on equity attributable to shareholders of Road for Year 9? Briefly explain.
Transcribed Image Text:
Inventory $160,000 Land 110,000 120,000 Estimated life 5 years Estimated life 8 years Plant and equipment Patent 40,000 90,000 $520,000 Goodwill Road Runner Sales $4,600,000 $2,160,000 Intercompany investment income 206,500 Rental revenue 190,000 2,350,000 860,000 Total income 4,806,500 2,300,000 Materials used in manufacturing Changes in work-in-progress and finished goods inventory 105,000 (10,000) Employee benefits 610,000 540,000 Interest expense Depreciation 310,000 200,000 465,000 275,000 Patent amortization 55,000 Rental expense 95,000 Income tax 360,000 4,205,000 $ 561,500 191,200 2,111,200 $ 238,800 Total expenses Profit January 1, Year 9 $247,000 December 31, Year 9 100,000
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