Assignment 2 This assignment should be completed after Chapter 7

QUESTION

Assignment
2

This
assignment should be completed after Chapter 7. It contributes 5% toward your
final grade. Remember to show all your work as partial marks may be awarded.

Question 1 (40
marks)

On October 1, 2010, Madison Ltd. acquired all the shares of Dobson Ltd.
for $849,600. On that date, Dobsons statement of financial position showed
share capital of $540,000 and retained earnings of $273,600. In addition, at
the acquisition date, all of Dobsons identifiable assets and liabilities had
carrying values that equaled their fair values.

Madison and Dobsons 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 goodswere
still in Madisons 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 Madisons consolidated financial statements for the year ended
September 30, 2014. (Round numbers to the nearest dollar, and show all your
calculations.)

Question 2 (60
marks)

On January 1,2015, Portia Ltd. issued shares worth $1,120,000 to Storm
Ltd. to acquire 80% of Storms outstanding shares. On the acquisition date,
Storms statement of financial position shows share capital of $420,000 and retained
earnings of $777,000. At the acquisition date, all of Storms 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, Storms accumulated amortization account for
the equipment had a balance of $805,000. As of the acquisition date, Storms
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, Storms 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
2,464,0001,835,400
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 Portias consolidated financial statements
for the year ended December 31, 2020. Be sure to show all your supporting
calculations.

ANSWER

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