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Problem
On January 1, 20X4, Chee Co. purchased 80% of the outstanding shares of Tyme Ltd. for $2,000,000 in cash. On the acquisition date, Tyme's shareholders' equity consisted of the following: Common shares $1,600,000 Retained earnings 800,000 At the time of acquisition, the carrying values of Tyme's identifiable net assets equalled their fair market values with the following exceptions:
The condensed income statements for Chee and Tyme are presented below:
Income Statements
Year ended December 31, 20X8
Chee Co.
Tyme Ltd.
Sales
$1,600,000
$ 720,000
Investment income
800,000
80,000
Gain on sale of land
___-___
54,400
Total revenue
2,400,000
854,400
Cost of goods sold
1,040,000
400,000
Other expenses
768,000
256,000
Total expenses
1,808,000
656,000
Net income
$ 592,000
$ 198,400
Additional information:
Required:
a) Prepare a consolidated income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting calculations.
b) Prove that your calculation of net income attributable to the shareholders of Chee Co. in (a) is correct by calculating Chee's net income using the equity method.
Calculate the gross margin percentage (Gross Profit divided by Net Sales) for each period presented in the income statement. What trend in gross margin do you observe and what factors may be causing this trend?
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