On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing shares valued at $1,600,000. On this date, Sauce's building and machinery had estimated remaining useful lives of 10 years and 5 years respectively. Both Victory and Sauce use straight-line depreciation. The separate-entity statements of financial position for Victory and Sauce just prior to the acquisition are presented below.

Statements of Financial Position

As of January 1, 20X7

Victory Co.Sauce Ltd.

(Carrying Value)

(Carrying Value)

(Fair Value)

Noncurrent assets:

Land

$-

$360,000

$640,000

Building

2,080,000

1,200,000

1,040,000

Accumulated depreciation

(320,000)

(400,000)

Machinery

1,400,000

1,040,000

80,000

Accumulated depreciation

(560,000)

(640,000)

Total noncurrent assets

2,600,000

1,560,000

Current assets:

Inventories

640,000

240,000

240,000

Accounts receivable

560,000

160,000

160,000

Cash

400,000

80,000

80,000

Total current assets

1,600,000

480,000

Total assets

$4,200,000

$2,040,000

Shareholders' Equity:

Common shares

$1,760,000

$800,000

Retained earnings

1,800,000

520,000

Total shareholders' equity

3,560,000

1,320,000

Noncurrent liabilities:

Long-term bank loan

-

400,000

400,000

Current liabilities:

A/P and accrued liabilites

640,000

320,000

320,000

Total liabilities

640,000

720,000

Total liabilities and shareholders' equity

$4,200,000

$2,040,000

The separate-entity financial statements for Victory and Sauce at the end of 20X7 are presented below.

Statements of Financial Position

As of December 31, 20X7

Victory Co.Sauce Ltd.

Noncurrent assets:

Long-term loan receivable

$400,000

$-

Land

-

1,080,000

Building

2,400,000

1,200,000

Accumulated depreciation

(360,000)

(480,000)

Machinery

1,600,000

1,040,000

Accumulated depreciation

(640,000)

(720,000)

Investment in Sauce Ltd.

1,200,000

____-___

Total noncurrent assets

4,600,000

2,120,000

Current assets:

Inventories

1,280,000

480,000

Amounts receivable

480,000

240,000

Cash

224,000

80,000

Total current assets

1,984,000

800,000

Total assets

$6,584,000

$2,920,000

Shareholders' Equity:

Common shares

$2,960,000

$800,000

Retained earnings

2,784,000

1,080,000

Total shareholders' equity

5,744,000

1,880,000

Noncurrent liabilities:

Long-term loans

520,000

800,000

Current liabilities:

Accounts payable

320,000

240,000

Total liabilities

840,000

1,040,000

Total liabilities and shareholders' equity

$6,584,000

$2,920,000

Statements of Comprehensive Income

For the year ended December 31, 20X7

Victory Co.Sauce Ltd.

Sales

$16,000,000

$8,000,000

Dividend income

192,000

-

Other income

56,000

____-____

16,248,000

8,000,000

Cost of sales

8,000,000

4,800,000

Other operating expenses

7,088,000

2,240,000

Interest expense

16,000

80,000

Total expenses

15,104,000

7,120,000

Net income and comprehensive income

$1,144,000

$880,000

Statements of Change in Equity - Retained Earnings Section

For the year ended December 31, 20X7

Victory Co.Sauce Ltd.

Retained earnings, December 31, 20X6

$1,800,000

$520,000

Net income

1,144,000

880,000

Dividends declared

(160,000)

(320,000)

Retained earnings, December 31, 20X7

$2,784,000

$1,080,000

During 20X7, Victory and Sauce had the following transactions between them:

On June 30, 20X7, Sauce borrowed $400,000 from Victory at an interest rate of 10% (simple interest). Interest is to be paid at the end of each calendar year.Sauce did not pay the 20X7 interest.

During 20X7, Sauce sold $3,200,000 of goods to Victory. At the end of 2007, $800,000 of those goods were still in Victory's ending inventory.

During 20X7, Victory sold $1,600,000 of goods to Sauce. At the end of 20X7, $320,000 of those goods were still in Sauce's ending inventory.

There was no impairment of goodwill for 20X7.

The separate-entity financial statements for Victory and Sauce at the end of 20X8 are presented below.

Statements of Financial Position

As of December 31, 20X8

Victory Co.Sauce Ltd.

Noncurrent assets:

Land

$-

$1,080,000

Building

3,040,000

1,200,000

Accumulated depreciation

(449,600)

(560,000)

Machinery

1,840,000

1,360,000

Accumulated depreciation

(544,000)

(516,000)

Investment in Sauce

1,200,000

____-___

Total noncurrent assets

5,086,400

2,704,000

Current assets:

Inventories

1,040,000

440,000

Accounts receivable

960,000

616,000

Cash

510,400

420,000

Total current assets

2,512,000

1,476,000

Total assets

$7,598,000

$4,180,000

Shareholders' Equity:

Common shares

$2,960,000

$800,000

Retained earnings

2,784,000

1,640,000

Total shareholders' equity

5,744,000

2,440,000

Noncurrent liabilities:

Long-term loan

1,440,000

960,000

Current liabilities:

Accounts payable

412,000

780,000

Total liabilities

1,852,800

1,740,000

Total liabilities and shareholders' equity

$7,598,800

$4,180,000

Statements of Comprehensive Income

For the year ended December 31, 20X8

Victory Co.Sauce Ltd.

Sales

$17,600,000

$8,800,000

Dividend income

288,000

-

Gain on sale of machine

80.000

Other income

96,000

____-____

18,064,000

8,800,000

Cost of sales

10,400,000

5,280,000

Other operating expenses

6,912,000

2,336,000

Interest expense

160,000

144,000

Total expenses

17,472,000

7,760,000

Net income and comprehensive income

$592,000

$1,040,000

Statements of Change in Equity - Retained Earnings Section

For the year ended December 31, 20X8

Victory Co.Sauce Ltd.

Retained earnings, December 31, 20X7

$2,784,000

$1,080,000

Net income

592,000

1,040,000

Dividends declared

(592,000)

(480,000)

Retained earnings, December 31, 20X8

$2,784,000

$1,640,000

Additional information for 20X8:

During 20X8, Victory purchase $1,280,000 in goods from Sauce. At the end of the year, half of these goods were still in Victory's inventory.

During December 20X8, Sauce purchased $320,000 in goods from Victory. At the end of the year, all of these goods were still in Sauce's inventory.

Both Victory and Sauce's gross margins for these goods were unchanged from previous years.

At the end of 20X8, Sauce did not pay the interest due on the loan from Victory, however, both companies had accrued the interest.

Required:

a)Prepare a consolidated statement of financial position at the acquisition date.

b)Prepare a set of consolidated financial statements for 20X7.

c)Calculate Victory's consolidated retained earnings for 20X8. Do not prepare financial statements.

Question 2 On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing shares valued at $1,600,000. On this date, Sauce's building and machinery had estimated remaining useful lives of 10 years and 5 years respectively. Both Victory and Sauce use straight-line depreciation. The separate-entity statements of financial position for Victory and Sauce just prior to the acquisition are presented below. Statements of Financial Position As of January 1, 20X7 Victory Co. (Carrying Value) Noncurrent assets: Land Building Accumulated depreciation Machinery Accumulated depreciation Total noncurrent assets Current assets: Inventories Accounts receivable Cash Total current assets Total assets Shareholders' Equity: Common shares Retained earnings Total shareholders' equity Noncurrent liabilities: Long-term bank loan Current liabilities: A/P and accrued liabilites Total liabilities Total liabilities and shareholders' equity $ Sauce Ltd. (Carrying (Fair Value) Value) 2,080,000 (320,000) 1,400,000 (560,000) 2,600,000 $ 360,000 1,200,000 (400,000) 1,040,000 (640,000) 1,560,000 $ 640,000 1,040,000 640,000 560,000 400,000 1,600,000 $4,200,000 240,000 160,000 80,000 480,000 $2,040,000 240,000 160,000 80,000 $1,760,000 1,800,000 3,560,000 $ 800,000 520,000 1,320,000 - 400,000 400,000 640,000 640,000 320,000 720,000 320,000 $4,200,000 $2,040,000 80,000 The separate-entity financial statements for Victory and Sauce at the end of 20X7 are presented below. ACCT 451v13 Assignment 1 September 2017 Statements of Financial Position As of December 31, 20X7 Victory Co. Noncurrent assets: Long-term loan receivable Land Building Accumulated depreciation Machinery Accumulated depreciation Investment in Sauce Ltd. Total noncurrent assets Current assets: Inventories Amounts receivable Cash Total current assets Total assets $ 400,000 $ 1,080,000 2,400,000 1,200,000 (360,000) (480,000) 1,600,000 1,040,000 (640,000) (720,000) 1,200,000 ____-___ 4,600,000 2,120,000 1,280,000 480,000 224,000 1,984,000 $6,584,000 Shareholders' Equity: Common shares $2,960,000 Retained earnings 2,784,000 Total shareholders' equity 5,744,000 Noncurrent liabilities: Long-term loans 520,000 Current liabilities: Accounts payable 320,000 Total liabilities 840,000 Total liabilities and shareholders' equity $6,584,000 ACCT 451v13 Assignment 1 Sauce Ltd. 480,000 240,000 80,000 800,000 $2,920,000 $ 800,000 1,080,000 1,880,000 800,000 240,000 1,040,000 $2,920,000 September 2017 Statements of Comprehensive Income For the year ended December 31, 20X7 Victory Co. Sauce Ltd. $16,000,000 $8,000,000 192,000 56,000 ____-____ 16,248,000 8,000,000 Cost of sales 8,000,000 4,800,000 Other operating expenses 7,088,000 2,240,000 Interest expense 16,000 80,000 Total expenses 15,104,000 7,120,000 Net income and comprehensive income $ 1,144,000 $ 880,000 Sales Dividend income Other income Statements of Change in Equity - Retained Earnings Section For the year ended December 31, 20X7 Victory Co. Sauce Ltd. Retained earnings, December 31, 20X6 $1,800,000 $ 520,000 Net income 1,144,000 880,000 Dividends declared (160,000) (320,000) Retained earnings, December 31, 20X7 $2,784,000 $1,080,000 During 20X7, Victory and Sauce had the following transactions between them: On June 30, 20X7, Sauce borrowed $400,000 from Victory at an interest rate of 10% (simple interest). Interest is to be paid at the end of each calendar year. Sauce did not pay the 20X7 interest. During 20X7, Sauce sold $3,200,000 of goods to Victory. At the end of 2007, $800,000 of those goods were still in Victory's ending inventory. During 20X7, Victory sold $1,600,000 of goods to Sauce. At the end of 20X7, $320,000 of those goods were still in Sauce's ending inventory. There was no impairment of goodwill for 20X7. The separate-entity financial statements for Victory and Sauce at the end of 20X8 are presented below. ACCT 451v13 Assignment 1 September 2017 Statements of Financial Position As of December 31, 20X8 Victory Co. Noncurrent assets: Land Building Accumulated depreciation Machinery Accumulated depreciation Investment in Sauce Total noncurrent assets Current assets: Inventories Accounts receivable Cash Total current assets Total assets $ Sauce Ltd. - $1,080,000 3,040,000 1,200,000 (449,600) (560,000) 1,840,000 1,360,000 (544,000) (516,000) 1,200,000 ____-___ 5,086,400 2,704,000 1,040,000 440,000 960,000 616,000 510,400 420,000 2,512,000 1,476,000 $7,598,000 $4,180,000 Shareholders' Equity: Common shares $2,960,000 $ 800,000 Retained earnings 2,784,000 1,640,000 Total shareholders' equity 5,744,000 2,440,000 Noncurrent liabilities: Long-term loan 1,440,000 960,000 Current liabilities: Accounts payable 412,000 780,000 Total liabilities 1,852,800 1,740,000 Total liabilities and shareholders' equity $7,598,800 $4,180,000 Statements of Comprehensive Income For the year ended December 31, 20X8 Victory Co. Sauce Ltd. $17,600,000 $8,800,000 288,000 80.000 96,000 ____-____ 18,064,000 8,800,000 Cost of sales 10,400,000 5,280,000 Other operating expenses 6,912,000 2,336,000 Interest expense 160,000 144,000 Total expenses 17,472,000 7,760,000 Net income and comprehensive income $ 592,000 $ 1,040,000 Sales Dividend income Gain on sale of machine Other income ACCT 451v13 Assignment 1 September 2017 Statements of Change in Equity - Retained Earnings Section For the year ended December 31, 20X8 Victory Co. Sauce Ltd. Retained earnings, December 31, 20X7 $2,784,000 $1,080,000 Net income 592,000 1,040,000 Dividends declared (592,000) (480,000) Retained earnings, December 31, 20X8 $2,784,000 $1,640,000 Additional information for 20X8: During 20X8, Victory purchase $1,280,000 in goods from Sauce. At the end of the year, half of these goods were still in Victory's inventory. During December 20X8, Sauce purchased $320,000 in goods from Victory. At the end of the year, all of these goods were still in Sauce's inventory. Both Victory and Sauce's gross margins for these goods were unchanged from previous years. At the end of 20X8, Sauce did not pay the interest due on the loan from Victory, however, both companies had accrued the interest. Required: a) Prepare a consolidated statement of financial position at the acquisition date. b) Prepare a set of consolidated financial statements for 20X7. c) Calculate Victory's consolidated retained earnings for 20X8. Do not prepare financial statements. ACCT 451v13 Assignment 1 September 2017