On December 31, 20X5, Paper Co $\quad$ $\quad$ $\quad$

question 19

Essay

On December 31, 20X5, Paper Co. purchased 60% of the outstanding common shares of Book Ltd. for $760,000 in shares and $200,000 in cash. The statements of financial position of Paper and Book immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Paper}\quad\quad\quad\text {Book}$
$\begin{array}{lllll}&\text { Book } & \text { Fair } & \text { Book } & \text { Fair } \\&\text { Value } & \text { Value } & \text { Value } & \text { Value } \\\text { Cash } & \$ 360 & \$ 360 & \$ 200 & \$ 200 \\\text { Accounts receivable } & 520 & 500 & 380 & 380 \\\text { Inventory } & 800 & 880 & 400 & 360 \\\text { Property, plant, and equipment } & \underline{1,820} & 2,000 & \underline{1,420} & 1,640 \\& \$ 3,500 & & \$ 2,400 &\end{array}$
$\begin{array}{lllll}\text { Accounts payable } & \$ 380 & \$ 380 & \$ 260 & \$ 260 \\\text { Long-term liabilities } & 1,200 & 1,200 & 1000 & 1000 \\\text { Common shares } & 500 & & 600 & \\\text { Retained earnings } & \underline{1,420} & & \underline{540} & \\& \$ 3,500 & & \$ 2,400 &\end{array}$

The difference in the carrying value and the fair value of the capital assets for Book relates to its office building. This building has an estimated 20 years remaining of useful life.
During 20X6, the year following the acquisition, the following occurred:
1. Throughout the year, Book purchased merchandise of $800,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20X6, Book still owed Paper $250,000 on this merchandise; 75% of this merchandise was resold by Book prior to December 31, 20X6.
2. Throughout the year, Book sold merchandise to Paper totalling $500,000. The gross margin on these products is 25%. At the end of 20X6, Paper had not yet resold 60% of this merchandise.
3. Management fees were paid to Paper from Book totalling $250,000.
4. Book paid dividends of $250,000 at the end of 20X6 and Paper paid dividends of $500,000.
During 20X7, the following occurred:
1. Throughout the year, Book purchased merchandise of $1,000,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20X6, Book still owed Paper $150,000 on this merchandise; 85% of this merchandise was resold by Book prior to December 31, 20X7.
2. Throughout the year, Book sold merchandise to Paper totalling $650,000. The gross margin in these products is 25%. At the end of 20X6, Paper had not yet resold 40% of this merchandise.
3. Management fees were paid to Paper from Book totalling $250,000.
4. Book paid dividends of $250,000 at the end of 20X7 and Paper paid dividends of $500,000.
5. An impairment loss of $100,000 was recognized related to the goodwill.
6. Paper uses the cost method to report its investment in Book. $\begin{array}{c}\text {Statement of Financial Position}\\\text {December 31, 20X7}\\\text {(in thousands of \$'s)}\\\\\begin{array}{|l|r|r|}\hline & \text { Paper } & \text { Book } \\\text { Assets } & \$ & \$\\\hline \text { Cash } & 50 & 210 \\\hline \text { Accounts receivable } & 575 & 410 \\\hline \text { Inventories } & 825 & 430 \\\hline \text { Property, plant, and equipment, net } & 2,870 & 1,760 \\\hline \text { Investment in Book } & \underline{960} & \\\hline \text { Total assets } & \underline{5,280} & \underline{2}, 810 \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Accounts payable } & 465 & 32 \\\hline \text { Long-term liabilities } & 1,290 & 950 \\\hline \text { Common shares } & 1,260 & 600 \\\hline \text { Retained earnings } & \underline{2,265} & \underline{935} \\\hline \text { Total liabilities and shareholders' equity } & \underline{5,280} & \underline{2,810} \\\hline\end{array}\end{array}$
$\begin{array}{c}\text {Statement of Comprehensive Income}\\\text { Year Ended December 31, 20X7}\\\text {(in thousands of \$'s)}\\\\\begin{array}{|l|r|r|} \hline & \text { Paper } & \text { Book } \\& \$ & \$\\\hline \text { Sales } & 2,520 & 2,400 \\\hline \text { Management fees } & 250 & \\\hline \text { Dividend income } & 150 & \\\hline & 2,920 & 2,400 \\\hline\\\hline \text { Cost of sales } & 800 & 1,200 \\\hline \text { Depreciation and amortization expenses } & 670 & 325 \\\hline \text { Management fees expense } & & 250 \\\hline \text { Other expenses } & \underline{460} & \underline{135} \\\hline & \underline{1,930} & \underline{1,910} \\\hline \text { Net income } & \underline{990} & \underline{\underline{490}} \\\hline \end{array}\end{array}$

$\begin{array}{c}\text { Statement of Changes in Equity-Retained Earnings Section}\\\text { Year Ended December 31, 20X7 }\\ \text { (in thousands of \$'s)}\\\\\begin{array}{|l|r|r|}\hline & \text { Paper } & \text { Book } \\& \$ & \$\\\hline \text { Retained earnings, December 31, 20X6 } & 1,775 & 695 \\\hline \text { Net income } & 990 & 490 \\\hline \text { Dividends declared } & \underline{(500)} & \underline{250}) \\\text { Retained earnings, December 31, 20X7 } & \underline{2,265} & \underline{235} \\\hline\end{array}\end{array}$
Required:
Prepare the consolidated statement of comprehensive income for Paper Co. for the year ended December 31, 20X7, under the entity method.
Calculate the consolidated retained earnings for Paper Co. as at December 31, 20X6, and 20X7.
Prepare the consolidated statement of retained earnings for Paper Co. as at December 31, 20X7.

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