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 goods were 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.)