Reference no: EM13333401

Problem 4

Balance Sheets

December 31, 20X6

	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 ab out 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 carry ing value, with the exception of the following items:
  
  Exc ess 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-l ine 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.