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Advanced Accounting, Financial Management

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Balance Sheets







Peony

Ltd.


Aster

Ltd.




Assets:










Cash


$ 62,500


$ 25,000




Accounts receivable


187,500


200,000




Inventories


225,000


125,000




Equipment


6,250,000


3,375,000




Accumulated amortization


(2,212,500)


(1,550,000)




Investment in Aster Ltd.


1,000,000


-




Other investments


125,000


____-____




Total assets


$5,637,500


$2,175,000




Liabilities and Shareholders'' Equity










Accounts payable


$ 562,500


$ 250,000




Bonds payable


375,000


625,000




Total liabilities


937,500


875,000




Common shares


1,500,000


375,000




Retained earnings


3,200,000


925,000




Total shareholders'' equity


4,700,000


1,300,000




Total liabilities and shareholders'' equity


$5,637,500


$2,175,000




Income Statements

Year Ended December 31, 20X6







Peony

Ltd.


Aster

Ltd.




Sales revenue


$2,500,000


$1,875,000




Royalty revenue


187,500


-




Dividend income


93,750


____-____




Total revenue


2,781,250


1,875,000




Cost of sales


1,500,000


1,125,000




Other expenses


700,000


513,750




Total expenses


2,200,000


1,638,750




Net income


$ 581,250


$ 236,250


Statements of Retained Earnings

December 31, 20X6







Peony

Ltd.


Aster

Ltd.




Retained earnings, beginning of year


$2,993,750


$ 801,250




Net income


581,250


236,250




Dividends declared


(375,000)


(112,500)




Retained earnings, end of year


$3,200,000


$ 925,000

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.

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