Balance sheets, 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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