Balance Sheets

Income Statements

Year Ended December 31, 20X6

Statements of Retained Earnings

December 31, 20X6

• 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.