Question 2 (60 marks) On January 1, 2015, Portia Ltd. issued shares worth $1,120
ID: 2475874 • Letter: Q
Question
Question 2 (60 marks)
On January 1, 2015, Portia Ltd. issued shares worth $1,120,000 to Storm Ltd. to acquire 80% of Storm’s outstanding shares. On the acquisition date, Storm’s statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Storm’s identifiable assets and liabilities equaled their fair values with the exception of the following:
Inventories (fair value exceeded book value by $14,000)
Investments (fair value exceeded book value by $14,000)
Equipment (fair value exceed net book value by $105,000)
At the acquisition date, Storm’s accumulated amortization account for the equipment had a balance of $805,000. As of the acquisition date, Storm’s equipment had a remaining useful life of 10 years.
Additional information:
Portia records its investments using the cost method.
Portia uses the entity theory method of consolidation.
In 2017, Portia sold all its investments for a gain of $63,000.
In 2018, Portia purchased equipment from Storm for $127,400. At the sale date, Storm’s net book value of the equipment was $98,000. Storm had originally purchased the equipment for $140,000. After the purchase, Portia amortized the equipment at a rate of $18,200 per year for the remaining 7 years of its useful life, taking a full year of amortization in 2018.
During 2019, Storm purchased goods from Portia. At the end of 2019, Storm still had $28,000 of these goods in inventory. Portia had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
During 2019, Portia purchased goods from Storm. At the end of 2019, Portia still had $140,000 of these goods in inventory. Storm had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
During 2020, Portia sold goods of $140,000 to Storm. Portia earned a gross profit of $56,000 on this sale. At the end of 2020, Storm still had $56,000 worth of goods in inventory.
During 2020, Storm sold goods of $980,000 to Portia at a gross margin of 40%. At the end of 2020, Portia still had 10% of the goods in inventory.
During 2020, Portia received $126,000 in royalties from Storm. Between January 1, 2015 and December 31, 2019, Portia received $700,000 in royalties from Storm.
The financial statements for Portia and Storm for the year ended December 31, 2020 are presented on the following pages.
Statement of Financial Position
As of December 31, 2020
Portia Ltd. Storm Ltd.
Assets:
Current assets:
Cash $ 70,000 $ 28,000
Accounts receivable 210,000 224,000
Inventory 252,000 140,000
532,000 392,000
Noncurrent assets:
Land 140,000 -
Equipment 7,000,000 3,780,000
Accumulated amortization, equipment (2,478,000) (1,736,000)
Investment in Storm 1,120,000 ____-___
5,782,000 2,044,000
Total assets $ 6,314,000 $ 2,436,000
Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable $ 630,000 $ 280,000
Noncurrent liabilities:
Loan payable 420,000 700,000
1,050,000 980,000
Shareholders’ equity:
Share capital 1,680,000 420,000
Retained earnings 3,584,000 1,036,000
5,264,000 1,456,000
$ 6,314,000 $ 2,436,000
Condensed Statement of Comprehensive Income
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Revenue:
Sales $ 2,804,200 $ 2,100,000
Royalties 210,000 -
Dividends 100,800 ____-___
3,115,000 2,100,000
Expenses:
Cost of sales 1,680,000 1,260,000
Other 784,000 575,400
2,464,000 1,835,400
Net and comprehensive income $ 651,000 $ 264,600
Statement of Changes in Equity – Retained Earnings Section
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Retained earnings, beginning of the year $ 3,353,000 $ 897,400
Net income 651,000 264,600
Dividends declared (420,000) (126,000)
Retained earnings, end of year $ 3,584,000 $ 1,036,000
Required:
Prepare Portia’s consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.
Explanation / Answer
Ans;
Consolidated Statement of Income For the year ended December 31, 2020
Portia Ltd. Storm Ltd Consolidated
Particulars Amount Amount Amount
Revenue:
Sales $2,944,200 $3,080,000 $6,024,200
Royalities $336,000 ---- $336,000
Dividends $100,800 ------- $100,800
______________ __________ _______________
$3,381,000 $3,080,000 $6,461,000
Less:
Cost of sales $1,764,000 $1,848,000
Other $ 784,000 $575,400
______________$2,548,000 ___________$2,423,400
____________ ___________
Net Income $833,000 $656,600
___________ _____________
Notes
Sales : portia = $140,000 added to sales
Storm: $980,000 added to sales
_______________________________________________________________________________
Cost of sales = sales - Gross profit
portia =$140,000 - $56,000 =$84,000
Storm =$980,000 -$392,000=$588,000
____________________________________________________________________________________
Gross profit portia =$56,000
Storm =$980,000 * 40/100=$392,000
__________________________________________________________________________________
Added royalty to portia
$126,000 +210,000 =$336,000
_________________________________________________________________________________________
Statement of Changes in Equity – Retained Earnings Section For the year ended December 31, 2020
Consolidated retained earnings =$4,250,400
ADD:Net Income =$1,489,600 (Takens from income statement)
___________
$5,740,000
Less: Dividends $546,000
____________
Ending retained earning $5,194,000
_________________________________________________________________________________________
For the balance sheet Except iNventory all items should be consolidated straightly, inventory have some changes
Inventory portia = opening Inventory =$140,000
Closing Inventory =$98,000 (10%of $980,000)
Storm opening inventory= $28,000
closing =$56,000
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