Asked by Angelisa Tejeda on Jun 24, 2024

Verified

On December 31, 20X2, Pipe Ltd. purchased 100% of the outstanding common shares of Fitter Ltd. for $10.5 million in cash. On that date, the shareholders' equity of Fitter 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 and amortization. Goodwill, if any arises as a result of this business combination, is written down if there is a permanent impairment in its value.
For the year ending December 31, 20X6, the income statements for Pipe and Fitter were as follows:
$\begin{array}{lll}& \text{Pipe }& \text{Fitter}\\ \text{ Sales and other revenue }& \underline{\$22,500,000}& \underline{\$9,800,000}\\ \text{ Cost of goods sold }& 16,000,000& 5,000,000\\ \text{ Depreciation expense }& 2,500,000& 2,000,000\\ \text{ Other expenses }& \underline{1,800,000}& \underline{1,200,000}\\ \text{Net income}& \underline{\$2,200,000}& \underline{1,600,000}\end{array}$ At December 31, 20X6, the condensed balance sheets for the two companies were as follows:
$$\begin{array}{lll}& \text{ Pipe }& \text{ Fitter }\\ \text{ Total assets }& \$31,000,000& \$13,500,000\end{array}$$ $$\begin{array}{lll}\text{ Liabilities }& \$5,000,000& \$1,200,000\\ \text{ No par common stock }& 12,100,000& 1,000,000\\ \text{ Retained earnings }& \underline{13,900,000}& \underline{11,300,000}\\ \text{ Total liabilities and shareholders’ equity }& \underline{\$13,000,000}& \underline{\$13,500,000}\end{array}$$ OTHER INFORMATION:
1. On December 31, 20X2, Fitter had a building with a fair value that was $500,000 greater than its carrying value. The building had an estimated remaining useful life of 20 years.
2. On December 31, 20X2, Fitter had trademark that was not reported on its balance sheet, but had a fair value that was $200,000. The trademark is amortized over 10 years.
3. During 20X6, Fitter sold merchandise to Pipe for $100,000, a price that included a gross profit of $40,000. During 20X6, 20% of this merchandise was resold by Pipe and the other 80% remains in its December 31, 20X6, inventories. On December 31, 20X5, the inventories of Pipe contained merchandise purchased from Fitter on which Fitter had recognized a gross profit in the amount of $50,000.
4. During 20X6, it was determined that the goodwill arising at the date of acquisition was impaired and that an impairment loss of $70,000 should be recorded. No impairment had been charged in earlier years.
5. During 20X6, Pipe declared and paid dividends of $300,000, while Fitter declared and paid dividends of $100,000.
6. Pipe accounts for its investment in Fitter using the cost method.
The retained earnings of Pipe as at December 31, 20X5, equalled $12,000,000. On that date, Fitter had retained earnings of $9,800,000. Fitter has not issued any common stock since its acquisition by Pipe.
Required:
Calculate the consolidated retained earnings at December 31, 20X5, and December 31, 20X6. Calculate the consolidated net earnings for 20X6. Prepare the consolidated statement of changes equity-partial statement showing the change in retained earnings for December 31, 20X6, for Pipe. Prepare the condensed consolidated statement of financial position for Pipe as at December 31, 20X6.