On December 31, 2012, Pine Corp. purchased 90% of the outstanding common shares of Spruce Ltd. for $5,175,000. On that date, Spruce had retained earnings of $4,000,000 and since that date has issued no additional common shares. On the purchase date, all of Spruce’s identifiable assets and liabilities had carrying values that were equal to their fair values except for:
1. Equipment, with 10 years of remaining life, which had a fair value that was $1,000,000 less than its carrying value.
2. Land which had a fair value that was $100,000 greater than its carrying value.
3. Accounts receivable with fair value that was $50,000 less than carrying value.
4. Long-term liabilities maturing December 31, 2020, which had fair values that were $200,000 less than their carrying values.
The December 31, 2019 Financial Statements of Pine and Spruce were as follows:
1. Both companies use the straight-line method to calculate depreciation, and the FIFO cost flow assumption for costing inventory.
2. Both companies pay income tax at a rate of 40%.
3. The 20,000 preferred shares of Spruce were issued in 2010 and have a 4% cumulative dividend. There have never been any preferred dividends in arrears and the shares are redeemable for $102 each.
4. The sales account in Pine’s income statement includes only sales of merchandise. All other revenue is included in “Gain on sale” or “Other revenues”.
5. During 2019, Pine charged Spruce $100,000 for management fees and Spruce charged $25,000 to Pine for rent. The rent charge remained unpaid at year-end.
6. During 2018, Spruce sold to Pine $500,000 worth of inventory. Of this amount, $300,000 was on hand at December 31, 2018, all of which was resold by Pine in 2019. Spruce’s sales are priced to provide it with a 40% gross margin.
7. During 2018, Pine sold $300,000 of inventory to Spruce and earned a gross profit of $120,000 on these sales. On December 31, 2018, $150,000 of this merchandise was still in the inventories of Spruce but was sold the following year.
8. During 2019, Pine sold inventory that had cost $60,000 to Spruce for $150,000. None of the inventory purchased by Spruce in 2019 was resold by December 31.
9. On January 1, 2019, Spruce sold to Pine a piece of equipment for $120,000. Spruce had purchased the equipment at the beginning of 1994 for $180,000, when it had an estimated useful life of 18 years with no salvage value.
10. On December 31, 2019, Pine sold land and building to Spruce for $1,500,000, paid in cash. At the time of the sale the building had a net book value of $800,000, and the land it was situated on had originally cost $200,000. Spruce allocated $1,100,000 of the purchase price to the building and the remainder to the land. The building has an estimated remaining useful life of 25 years on this date
Required (show all work for full marks): Prepare the 2019 consolidated financial statements.
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