Question

Question 1                                                                                     

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

                                                                                                     102,600                        77,400

Shareholders’ equity:  

Share capital                                                                              900,000                      540,000

Retained earnings                                                                     540,000                      484,200

                                                                                                1,440,000                1,024,200

                                                                                                $1,542,600                $1,101,600

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                                                            ___-___                     ___-___

Share capital, September 30, 2014                                         900,000                      540,000

Retained earnings, October 1, 2013                                        424,476                      299,304

Net income                                                                                  259,524                      184,896

Dividends declared                                                                   (144,000)                     ______

Retained earnings, September 30, 2014                                 540,000                     484,200

                                                                                                $ 1,440,000              $ 1,024,200

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.)

Answer 1