Question 1 (40 marks)
On October 1, 2010, Madison Ltd. acquired all the shares of Dobson Ltd. for
$849,600. On that date, Dobson’s statement of financial position showed
share capital of $540,000 and retained earnings of $273,600. In addition, at
the acquisition date, all of Dobson’s identifiable assets and liabilities had
carrying values that equaled their fair values.
Madison and Dobson’s financial statements for September 30, 2014 are
presented below:
Statement of Financial Position
As of September 30, 2014
Madison Ltd.
Dobson Ltd.
Assets:
Current assets:
Cash $ 144,000 $
131,400
Short-term investments 27,000
122,400
Accounts receivable 18,000
540,000
Inventory 302,400
64,800
491,400
858,600
Non-current assets:
Land 126,000
216,000
Equipment, net 75,600
27,000
Investment in Dobson 849,600
___-___
1,051,200
243,000
1,542,600
1,101,600
Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable 9,000
23,400
Non-current liabilities:
Deferred income taxes 93,600
54,000
Statement of Income
For the year ended September 30, 2014
Madison Ltd.
Dobson Ltd.
Sales revenue $ 2,152,500 $
1,670,400
Cost of sales 1,598,400
1,207,225
Gross profit 554,100
463,175
Expenses:
Salaries and benefits 103,500
57,600
Amortization 9,360
8,640
Other 7,200
__-___
120,060
66,240
Other revenues and expenses:
Investment income 300
1,225
Loss on disposal of asset (1,800)
__-___
432,540
398,160
Income tax expense 173,016
213,264
Net income $ 259,524 $
184,896
Statement of Changes in Equity
For the year ended September 30, 2014
Madison Ltd.
Dobson Ltd.
Share capital, October 1, 2013 $ 900,000 $
540,000
Changes during the year ___-___
___-___
Additional information:
Both companies use a perpetual inventory system, have a September 30
year-end, and a 30% tax rate. Madison uses the entity theory method for
consolidation.
On June 30, 2014, Madison sold some equipment to Dobson for $10,800.
At that date, the net book value of the equipment to Madison was
$12,600. The equipment is expected to have a remaining useful life of 10
years.
On April 1, 2014, Madison purchased $90,000 of merchandise from
Dobson. Dobson had acquired the goods for $54,000. On July 15, Madison
sold half of the goods to a customer for $50,400. The remaining goods
were still in Madison’s inventory at its 2014 fiscal year-end.
At October 1, 2013, Madison had some goods in inventory that it had
purchased from Dobson at May 25, 2013. The profit on these goods was
$10,800. These goods were sold by December 31, 2013.
In 2011, Madison sold a tract of land to Dobson for an accounting gain of
$36,000. Dobson plans to build a warehouse and office complex on the
land in 2015.
Required:
Prepare Madison’s consolidated financial statements for the year ended
September 30, 2014. (Round numbers to the nearest dollar, and show all your
calculations.)
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