On December 31, 20X1, Dad Ltd At December 31, 20X6, the Condensed Statements of Financial Position

question 35

Essay

On December 31, 20X1, Dad Ltd. purchased 100% of the outstanding common shares of Sad Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Sad totalled $8 million and consisted of $1 million in no par 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 impairment. Both Dad and Sad report under accounting standards for private enterprises.
For the year ending December 31, 20X6, the statements of earnings for Dad and Sad were as follows:
$\begin{array}{lll}&\text { Dad}&\text { Sad}\\\text { Sales and other revenue } & \underline{\$ 22,500,000} & \underline{\$ 9,800,000} \\\text { Cost of goods sold } & 16,000,000 & 5,000,000 \\\text { Amortization expense } & 2,500,000 & 2,000,000 \\\text { Other expenses (including taxes) } & \underline{1,800,000} & \underline{1,200,000} \\\text { Total expenses (including taxes) } & \underline{20,300,000} & \underline{8,200,000} \\\text { Net income } &\underline{ \$ 2,200,000} &\underline{ \$ 1,600,000}\end{array}$ At December 31, 20X6, the condensed statements of financial position for the two companies were as follows:
$\begin{array}{lll}& \text { Dad } & \text { Sad } \\\text { Total assets } & \$ 31,000,000 & \$ 13,500,000\end{array}$ $$\begin{array} { l l l } \text { Liabilities } & \$ 5,000,000 & \$ 1,200,000 \\\text { No par common shares } & 12,100,000 & 1,000,000 \\\text { Retained earnings } & \underline { 13,900,000 } & \underline { 11,300,000 } \\\text { Total liabilities andshareholders' equity } &\underline {\$ 1,000,000} &\underline { \$ 13,500,000}\end{array}$$
OTHER INFORMATION:
1. On December 31, 20X1, Sad 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.
2. On December 31, 20X1, Sad had inventory with a fair value that was $200,000 less than its carrying value. This inventory was sold in 20X3.
3. During 20X6, Dad sold merchandise to Sad for $100,000, a price that includes a gross profit of $40,000. During 20X6, 40% of this merchandise was resold by Sad to third parties and the other 60% remains in its December 31, 20X6, inventories. On December 31, 20X5, the inventories of Sad contained merchandise purchased from Dad on which Dad had recognized a gross profit in the amount of $20,000.
4. During 20X6, Dad declared and paid dividends of $300,000 while Sad declared and paid dividends of $100,000.
5. Dad accounts for its investment in Sad using the cost method.
6. The retained earnings of Dad as at December 31, 20X5, was $12,000,000. On that date, Sad had retained earnings of $9,800,000. Sad has not issued any common shares since its acquisition by Dad.
7. There were no specific events or circumstances between 20X2 and 20X6 to indicate any impairment of goodwill.
Required:
Calculate consolidated net income for the year ending December 31, 20X6. Prepare the consolidated statement of comprehensive income for the year ended December 31, 20X6.

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Definitions:

Quantity Theory

A theory in economics that asserts the general price level of goods and services is directly proportional to the amount of money in circulation.

Equation of Exchange

An economic formula representing the relationship between money supply, velocity of money, price level, and an economy's output of goods and services.

Economic Problems

Issues arising from the allocation of scarce resources among competing uses, leading to questions of what, how, and for whom to produce.

Velocity of Money

The rate at which money circulates or turns over in an economy in a given period of time, used as an indicator of economic activity.