On December 31, 2009, Cawthra Ltd As at December 31, 2014, the Condensed Statements of Financial

question 12

Essay

On December 31, 2009, Cawthra Ltd. purchased 100% of the outstanding common shares of Lawlor Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Lawlor totaled $8 million and consisted of $1 million in common shares and $7 million in retained earnings. Both companies use the straight-line method to calculate depreciation. Goodwill, if any arises as a result of this business combination, is written down when there is an impairment. Both Cawthra and Lawlor report under accounting standards for private enterprises and pay tax at the rate of 40%.
For the year ending December 31, 2014, the statements of earnings for Cawthra and Lawlor were as follows:
$\begin{array}{lrr} & \text { Cawthra } & \text { Lawlor } \\\text { Sales and other revenue } & \$ 22,500,000 & \$ 9,800,000 \\\text { Cost of goods sold } & 16,000,000 & 5,000,000 \\\text { Depreciation expense } & 2,500,000 & 2,000,000 \\\text { Other expenses } & \underline{1,800,000} & \underline{1,200,000} \\\text { Net income } & \$ 2,200,000 & \$ 1,600,000\end{array}$ As at December 31, 2014, the condensed statements of financial position for the two companies were as follows:
$\begin{array}{lrr}&{\text { Cawthra }}&{\text { Lawlor }} & \\\text { Total assets } & \$ 31,000,000 & \$ 13,500,000 \\& & \\\text { Liabilities } & \$ 5,000,000 & \$ 1,200,000 \\\text { No par common shares } & 12,100,000 & 1,000,000 \\\text { Retained earnings } & 13,900,000 & 11,300,000 \\\text { Total } & \$ 31,000,000 & \$ 13,500,000\end{array}$ Other Information:
-On December 31, 2009, Lawlor had a building with a fair value that was $300,000 greater than its carrying value. The building had an estimated remaining useful life of 20 years.
-On December 31, 2009, Lawlor had inventory with a fair value that was $200,000 less than its carrying value. This inventory was sold in 2011.
-During 2014, Cawthra sold merchandise to Lawlor for $100,000, a price that includes a gross profit of $40,000. During 2014, 40% of this merchandise was resold by Lawlor to third parties and the other 60% remains in its December 31, 2014 inventories. On December 31, 2013, the inventories of Lawlor contained merchandise purchased from Cawthra on which Cawthra had recognized a gross profit in the amount of $20,000.
-During 2014, Cawthra declared and paid dividends of $300,000 while Lawlor declared and paid dividends of $100,000.
-Cawthra accounts for its investment in Lawlor using the cost method.
-The retained earnings of Cawthra as at December 31, 2013 was $12,000,000. On that date, Lawlor had retained earnings of $9,800,000. Lawlor has not issued any common shares since its acquisition by Cawthra.
-There were no specific events or circumstances between 2010 and 2014 to indicate any impairment of goodwill.
Required: Calculate consolidated net income for the year ending December 31, 2014.

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