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Question 1 On October 1, 2010, Madison Ltd. acquired all the shares of Dobson Ltd. for $849,600.
Question 1
On October 1, 2010, Madison Ltd. acquired all the shares of Dobson Ltd. for $849,600. On that date, Dobson's statement of financial position showed share capital of $540,000 and retained earnings of $273,600. In addition, at the acquisition date, all of Dobson's identifiable assets and liabilities had carrying values that equaled their fair values.
Madison and Dobson's financial statements for September 30, 2014 are presented below:
Statement of Financial Position
As of September 30, 2014
Madison Ltd. Dobson Ltd.
Assets:
Current assets:
Cash $ 144,000 $ 131,400
Short-term investments 27,000 122,400
Accounts receivable 18,000 540,000
Inventory 302,400 64,800
491,400 858,600
Non-current assets:
Land 126,000 216,000
Equipment, net 75,600 27,000
Investment in Dobson 849,600 ___-___
1,051,200 243,000
1,542,600 1,101,600
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable 9,000 23,400
Non-current liabilities:
Deferred income taxes 93,600 54,000
102,600 77,400
Shareholders' equity:
Share capital 900,000 540,000
Retained earnings 540,000 484,200
1,440,000 1,024,200
$1,542,600 $1,101,600
Statement of Income
For the year ended September 30, 2014
Madison Ltd. Dobson Ltd.
Sales revenue $ 2,152,500 $ 1,670,400
Cost of sales 1,598,400 1,207,225
Gross profit 554,100 463,175
Expenses:
Salaries and benefits 103,500 57,600
Amortization 9,360 8,640
Other 7,200 __-___
120,060 66,240
Other revenues and expenses:
Investment income 300 1,225
Loss on disposal of asset (1,800) __-___
432,540 398,160
Income tax expense 173,016 213,264
Net income $ 259,524 $ 184,896
Statement of Changes in Equity
For the year ended September 30, 2014
Madison Ltd. Dobson Ltd.
Share capital, October 1, 2013 $ 900,000 $ 540,000
Changes during the year ___-___ ___-___
Share capital, September 30, 2014 900,000 540,000
Retained earnings, October 1, 2013 424,476 299,304
Net income 259,524 184,896
Dividends declared (144,000) ______
Retained earnings, September 30, 2014 540,000 484,200
$ 1,440,000 $ 1,024,200
Additional information:
· Both companies use a perpetual inventory system, have a September 30 year-end, and a 30% tax rate. Madison uses the entity theory method for consolidation.
· On June 30, 2014, Madison sold some equipment to Dobson for $10,800. At that date, the net book value of the equipment to Madison was $12,600. The equipment is expected to have a remaining useful life of 10 years.
· On April 1, 2014, Madison purchased $90,000 of merchandise from Dobson. Dobson had acquired the goods for $54,000. On July 15, Madison sold half of the goods to a customer for $50,400. The remaining goods were still in Madison's inventory at its 2014 fiscal year-end.
· At October 1, 2013, Madison had some goods in inventory that it had purchased from Dobson at May 25, 2013. The profit on these goods was $10,800. These goods were sold by December 31, 2013.
· In 2011, Madison sold a tract of land to Dobson for an accounting gain of $36,000. Dobson plans to build a warehouse and office complex on the land in 2015.
Required:
Prepare Madison's consolidated financial statements for the year ended September 30, 2014. (Round numbers to the nearest dollar, and show all your calculations.)
Question 2
On January 1, 2015, Portia Ltd. issued shares worth $1,120,000 to Storm Ltd. to acquire 80% of Storm's outstanding shares. On the acquisition date, Storm's statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Storm's identifiable assets and liabilities equaled their fair values with the exception of the following:
Inventories (fair value exceeded book value by $14,000)
Investments (fair value exceeded book value by $14,000)
Equipment (fair value exceed net book value by $105,000)
At the acquisition date, Storm's accumulated amortization account for the equipment had a balance of $805,000. As of the acquisition date, Storm's equipment had a remaining useful life of 10 years.
Additional information:
· Portia records its investments using the cost method.
· Portia uses the entity theory method of consolidation.
· In 2017, Portia sold all its investments for a gain of $63,000.
· In 2018, Portia purchased equipment from Storm for $127,400. At the sale date, Storm's net book value of the equipment was $98,000. Storm had originally purchased the equipment for $140,000. After the purchase, Portia amortized the equipment at a rate of $18,200 per year for the remaining 7 years of its useful life, taking a full year of amortization in 2018.
· During 2019, Storm purchased goods from Portia. At the end of 2019, Storm still had $28,000 of these goods in inventory. Portia had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
· During 2019, Portia purchased goods from Storm. At the end of 2019, Portia still had $140,000 of these goods in inventory. Storm had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
· During 2020, Portia sold goods of $140,000 to Storm. Portia earned a gross profit of $56,000 on this sale. At the end of 2020, Storm still had $56,000 worth of goods in inventory.
· During 2020, Storm sold goods of $980,000 to Portia at a gross margin of 40%. At the end of 2020, Portia still had 10% of the goods in inventory.
· During 2020, Portia received $126,000 in royalties from Storm. Between January 1, 2015 and December 31, 2019, Portia received $700,000 in royalties from Storm.
The financial statements for Portia and Storm for the year ended December 31, 2020 are presented on the following pages.
Statement of Financial Position
As of December 31, 2020
Portia Ltd. Storm Ltd.
Assets:
Current assets:
Cash $ 70,000 $ 28,000
Accounts receivable 210,000 224,000
Inventory 252,000 140,000
532,000 392,000
Noncurrent assets:
Land 140,000 -
Equipment 7,000,000 3,780,000
Accumulated amortization, equipment (2,478,000) (1,736,000)
Investment in Storm 1,120,000 ____-___
5,782,000 2,044,000
Total assets $ 6,314,000 $ 2,436,000
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 630,000 $ 280,000
Noncurrent liabilities:
Loan payable 420,000 700,000
1,050,000 980,000
Shareholders' equity:
Share capital 1,680,000 420,000
Retained earnings 3,584,000 1,036,000
5,264,000 1,456,000
$ 6,314,000 $ 2,436,000
Condensed Statement of Comprehensive Income
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Revenue:
Sales $ 2,804,200 $ 2,100,000
Royalties 210,000 -
Dividends 100,800 ____-___
3,115,000 2,100,000
Expenses:
Cost of sales 1,680,000 1,260,000
Other 784,000 575,400
2,464,000 1,835,400
Net and comprehensive income $ 651,000 $ 264,600
Statement of Changes in Equity - Retained Earnings Section
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Retained earnings, beginning of the year $ 3,353,000 $ 897,400
Net income 651,000 264,600
Dividends declared (420,000) (126,000)
Retained earnings, end of year $ 3,584,000 $ 1,036,000
Required:
Prepare Portia's consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.
