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

2,464,000 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 Portias consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.