Fort Bend Company contributes cash of $250,000 and Costal Bend Company contributes net assets of $250,000 to create Victoria Company on January 2011. Fort Bend and Costal Bend each received a 50% equity interest in Victoria. Victoria's financial statements for the first year of operations are as follows:
Victoria Company
- Income Statement 2011
- Revenues $170,000
- Expenses 100,000
- Income before tax 70,000
- Tax expense 10,000
- Net income $60,000
Victoria Company
- Balance Sheet
- December 31, 2011
- Cash $100,000
- Liabilities $190,000
- Inventory 130,000
- Common stock 500,000 PPE (net) 520,000
- Retained earnings 60,000
- Total $750,000
- Total $750,000
Before making any accounting entries related to its investment in Victoria, Fort Bend Company's financial statement for the year ended December 31, 2011 are as follows:
Fort Bend Company
- Income Statement 2011
- Revenues $900,000
- Expenses (500,000)
- Income before tax 400,000
- Tax expense (100,000)
- Net income $300,000
Fort Bend Company
- Balance Sheet December 31, 2011
- Cash $150,000
- Liabilities $100,000
- Inventory 200,000
- Common stock 850,000
- PPE (net) 750,000
- Retained earnings 400,000
- Invest in Victoria 250,000
- Total $1,350,000 Total $1350,000
Required:
(1) Restate Fort Bend's 2011 financial statements to properly account for its investment in Victoria Company under 1) the proportionate consolidation method, and 2) the equity method.
(2) Calculate and compare the following ratios for Fort Bend Company under the two different methods for accounting for its investment in Victoria Company: 1)profit margin (net income/revenues), and 2) debt to equity (total liabilities / total stockholders' equity)