Balance Sheets
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Peony
Ltd.
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Aster
Ltd.
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Assets:
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|
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Cash
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$ 62,500
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$ 25,000
|
|
Accounts receivable
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187,500
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200,000
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|
Inventories
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225,000
|
125,000
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|
Equipment
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6,250,000
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3,375,000
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|
Accumulated amortization
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(2,212,500)
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(1,550,000)
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|
Investment in Aster Ltd.
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1,000,000
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-
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|
Other investments
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125,000
|
____-____
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|
Total assets
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$5,637,500
|
$2,175,000
|
|
Liabilities and Shareholders' Equity
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|
|
|
Accounts payable
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$ 562,500
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$ 250,000
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|
Bonds payable
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375,000
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625,000
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Total liabilities
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937,500
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875,000
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Common shares
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1,500,000
|
375,000
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|
Retained earnings
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3,200,000
|
925,000
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|
Total shareholders' equity
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4,700,000
|
1,300,000
|
|
Total liabilities and shareholders' equity
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$5,637,500
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$2,175,000
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Income Statements
Year Ended December 31, 20X6
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Peony
Ltd.
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Aster
Ltd.
|
|
Sales revenue
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$2,500,000
|
$1,875,000
|
|
Royalty revenue
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187,500
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-
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|
Dividend income
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93,750
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____-____
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Total revenue
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2,781,250
|
1,875,000
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|
Cost of sales
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1,500,000
|
1,125,000
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|
Other expenses
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700,000
|
513,750
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|
Total expenses
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2,200,000
|
1,638,750
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|
Net income
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$ 581,250
|
$ 236,250
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Statements of Retained Earnings
December 31, 20X6
|
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Peony
Ltd.
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Aster
Ltd.
|
|
Retained earnings, beginning of year
|
$2,993,750
|
$ 801,250
|
|
Net income
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581,250
|
236,250
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Dividends declared
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(375,000)
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(112,500)
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Retained earnings, end of year
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$3,200,000
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$ 925,000
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- At January 1, 20X1, Peony Ltd. acquired 80% of the common shares of Aster Ltd. by issuing 500,000 Peony common shares valued at $2 per share. This resulted in Peony having 1,500,000 issued and outstanding shares.
- Peony has provided the following information about Aster at the acquisition date:
Aster's shareholders' equity consisted of the following:
Common shares $375,000
Retained earnings 693,750
Fair value of Aster's net identifiable assets equalled their carrying value, with the exception of the following items:
Excess of fair value
over carrying value:
Inventories $ 12,500
Equipment 93,750
Investments 12,500
The accumulated amortization on the equipment was $718,750. The equipment is amortized on a straight-line basis. At the acquisition date, the equipment is estimated to have a remaining life of 10 years with no residual value.
- In 20X3, Aster sold its investments to parties outside the consolidated entity for $56,250 over carrying value.
- From the acquisition date to December 31, 20X5, Aster paid royalties of $625,000 to Peony. During 20X6, Aster paid $112,500 in royalties to Peony.
- At the beginning of 20X4, Peony purchased some equipment from Aster for $113,750. Aster had originally acquired the equipment for $125,000 and was amortizing it at a rate of $12,500 per year. When Aster sold the equipment to Peony, it had a carrying value of $87,500. At that time, Peony estimated that the equipment had a remaining life of 7 years and started amortizing the equipment in 20X4, using the straight-line method with no residual value.
- At December 31, 20X5, Aster's inventory included $25,000 of goods purchased from Peony. Peony's gross margin on the sale was 40%. The goods were sold to third parties in 20X6.
- At December 31, 20X5, Peony's inventory included $125,000 of goods purchased from Aster. Aster's gross margin on the sale was 40%. The goods were sold to third parties in 20X6.
- During 20X6, Peony sold goods to Aster for $125,000. Peony's gross margin on the sale was 40%. At December 31, 20X6, $50,000 of the goods are still in Aster's inventory.
- During 20X6, Aster sold goods to Peony for $875,000. Aster's gross margin on the sale was 40%. At December 31, 20X6, $87,500 of the goods are still in Peony's inventory.
- Peony uses the entity method to report business combinations.
Required:
Prepare the consolidated financial statements for Peony at December 31, 20X6 using the direct method. Show all your work.