â€¢ Runner regularly sells raw materials to Road. Intercompany sales in Year 5 totaled $420,000.
â€¢ Intercompany profits in the inventories of Road were as follows:
January 1, Year 5………… $75,000
December 31, Year 5………… 40,000
â€¢ Roadâ€™s entire rental expense relates to equipment rented from Runner.
â€¢ A goodwill impairment loss of $3,000 occurred in Year 5.
â€¢ Retained earnings at December 31, Year 5, for Road and Runner were $2,525,700 and $1,150,000, respectively.
â€¢ Road uses the equity method to account for its investment, and uses income tax allocation at the rate of 40% when it prepares consolidated statements.
(a) Prepare a consolidated income statement for Year 5 with expenses classified by nature.
(b) Calculate consolidated retained earnings at December 31, Year 5.
(c) If Road had used parent company extension theory rather than entity theory, how would this affect the return on equity attributable to shareholders of Road for Year 5?