ACCT 451 V12 Assignment 2 (2014)Assignment 2This 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

ACCT 451 V12 Assignment 2 (2014)

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, 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.
$

Assets:
Current assets:
Cash
Short-term investments
Accounts receivable
Inventory
Non-current assets:
Land
Equipment, net
Investment in Dobson

$

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

131,400
122,400
540,000
64,800
858,600
216,000
27,000
___-___
243,000
1,101,600

9,000

54,000
77,400

900,000
540,000
1,440,000
$1,542,600

Assignment 2

23,400

93,600
102,600

Shareholders equity:
Share capital
Retained earnings

ACCT451v12

Dobson Ltd.

540,000
484,200
1,024,200
$1,101,600

June 26/2014

2

Statement of Income
For the year ended September 30, 2014
Madison 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

Sales revenue
Cost of sales
Gross profit

Dobson Ltd.

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 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.)

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
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.

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

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
700,000
980,000

1,680,000
3,584,000
5,264,000
$ 6,314,000

Shareholders equity:
Share capital
Retained earnings

420,000
1,050,000

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

ACCT451v12

Assignment 2

June 26/2014