ACC451 Assignment 2

ACC451 Assignment 2

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

 

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 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.)

 

 

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.

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 Portia’s consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.

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