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.