Problem
The balance sheets of ABD Inc. and C Corporation on December 31, 2016 are given below:
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ABD Inc.
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C Corp.
|
|
Assets
|
|
|
|
Cash
|
$300
|
$-0-
|
|
Account receivable
|
-0-
|
600
|
|
Inventory
|
300
|
-0-
|
|
Current assets
|
600
|
600
|
|
Plant & equipment, net
|
-0-
|
800
|
|
Total
|
$600
|
$1,400
|
|
Liabilities and shareholders' equity
|
|
|
|
Account payable
|
$250
|
$-0-
|
|
Long-term debt
|
-0-
|
1,050
|
|
Total liabilities
|
$250
|
$1,050
|
|
Common stock ($1 par)
|
200
|
200
|
|
Additional paid-in capital
|
50
|
-0-
|
|
Retained earnings
|
100
|
150
|
|
Total
|
$600
|
$1,400
|
Required
Immediately following the preparation of B/S above, ABD issued 500 shares of its common stock at $1.10 per share, and used the $550 proceed to purchase 100% of the common stock of C.
(a) Determine the amount of goodwill ABD should recognize for this transaction.
(b) Prepare the consolidated B/S that ABD would report immediately following the investment in C. Assume that the market value of C's asset at the time of acquisition is $1,500 (with market value of PPE at $900; for all others are the same as stated).
(c) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the acquisition.
(For this question only) Suppose that ABD purchases (paid with existing cash; no issuance of stock) 50% of the outstanding common shares of C for $225.
(a) Prepare the B/S of ABD after the purchase (equity method) of investment. Assume that the market value of C's asset at the time of purchase is $1,500 (with market value of PPE at $900).
(b) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the purchase.
(Continuing from Requirement 2) Suppose that you, as a prominent financial analyst, decide to apply the proportionate consolidation on ABD's balance sheet after the purchase of C.
(a) Prepare the B/S of ABD with the proportionate consolidation.
(b) Determine and explain the effect of proportionate consolidation on current ratio, long-term debt-to-equity ratio, and indicate (higher, lower, or no change) and explain the effect on ROA ratio (you cannot calculate ROA due to limited information).