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1 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, 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 Assets: Current assets: Cash Short-term investments Accounts receivable Inventory Non-current assets: Land Equipment, net Investment in Dobson Dobson Ltd. $ $ 144,000 27,000 18,000 302,400 491,400 126,000 75,600 849,600 1,051,200 1,542,600 Liabilities and shareholders' equity: Current liabilities: Accounts payable Non-current liabilities: Deferred income taxes Shareholders' equity: Share capital Retained earnings ACCT451v12 Madison Ltd. Assignment 2 131,400 122,400 540,000 64,800 858,600 216,000 27,000 ___-___ 243,000 1,101,600 9,000 23,400 93,600 102,600 54,000 77,400 900,000 540,000 1,440,000 $1,542,600 540,000 484,200 1,024,200 $1,101,600 June 26/2014 2 Statement of Income For the year ended September 30, 2014 Sales revenue Cost of sales Gross profit Madison Ltd. Dobson Ltd. $ 2,152,500 1,598,400 554,100 $ 1,670,400 1,207,225 463,175 103,500 9,360 7,200 120,060 57,600 8,640 __-___ 66,240 300 (1,800) 432,540 173,016 $ 259,524 1,225 __-___ 398,160 213,264 184,896 Expenses: Salaries and benefits Amortization Other Other revenues and expenses: Investment income Loss on disposal of asset Income tax expense Net income $ Statement of Changes in Equity For the year ended September 30, 2014 Madison Ltd. Dobson Ltd. Share capital, October 1, 2013 Changes during the year Share capital, September 30, 2014 $ $ Retained earnings, October 1, 2013 Net income Dividends declared Retained earnings, September 30, 2014 424,476 259,524 (144,000) 540,000 $ 1,440,000 ACCT451v12 Assignment 2 900,000 ___-___ 900,000 540,000 ___-___ 540,000 299,304 184,896 ______ 484,200 $ 1,024,200 June 26/2014 3 Additional information: Both companies use a perpetual inventory system, have a September 30 yearend, 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.) ACCT451v12 Assignment 2 June 26/2014 4 Question 2 (60 marks) 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. ACCT451v12 Assignment 2 June 26/2014 5 Statement of Financial Position As of December 31, 2020 Portia Ltd. Assets: Current assets: Cash Accounts receivable Inventory $ Noncurrent assets: Land Equipment Accumulated amortization, equipment Investment in Storm Total assets Liabilities and shareholders' equity: Current liabilities: Accounts payable Noncurrent liabilities: Loan payable Shareholders' equity: Share capital Retained earnings 70,000 210,000 252,000 532,000 Storm Ltd. $ 28,000 224,000 140,000 392,000 140,000 7,000,000 (2,478,000) 1,120,000 5,782,000 $ 6,314,000 3,780,000 (1,736,000) ____-___ 2,044,000 $ 2,436,000 $ $ 630,000 280,000 420,000 1,050,000 700,000 980,000 1,680,000 3,584,000 5,264,000 $ 6,314,000 420,000 1,036,000 1,456,000 $ 2,436,000 Condensed Statement of Comprehensive Income For the year ended December 31, 2020 Portia Ltd. Revenue: Sales Royalties Dividends $ 2,804,200 $ 2,100,000 210,000 100,800 ____-___ 3,115,000 2,100,000 Expenses: Cost of sales Other Net and comprehensive income ACCT451v12 Storm Ltd. Assignment 2 1,680,000 1,260,000 784,000 575,400 2,464,000 1,835,400 $ 651,000 $ 264,600 June 26/2014 6 Statement of Changes in Equity - Retained Earnings Section For the year ended December 31, 2020 Retained earnings, beginning of the year Net income Dividends declared Retained earnings, end of year Portia Ltd. Storm Ltd. $ 3,353,000 $ 897,400 651,000 264,600 (420,000) (126,000) $ 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. ACCT451v12 Assignment 2 June 26/2014