Question
In: Accounting
The balance sheets of ABD Inc. and C Corporation on December 31, 2017 are given below:...
The balance sheets of ABD Inc. and C Corporation on December 31, 2017 are given below:
|
ABD Inc. |
C Corp. |
|
|
Assets |
||
|
Cash |
$800 |
$-0- |
|
Account receivable |
-0- |
900 |
|
Inventory |
700 |
-0- |
|
Current assets |
1,500 |
900 |
|
Plant & equipment, net |
-0- |
1,200 |
|
Total |
$1,500 |
$2,100 |
|
Liabilities and shareholders’ equity |
||
|
Account payable |
$600 |
$-0- |
|
Long-term debt |
-0- |
1,500 |
|
Total liabilities |
$600 |
$1,500 |
|
Common stock ($1 par) |
500 |
500 |
|
Additional paid-in capital |
100 |
-0- |
|
Retained earnings |
300 |
100 |
|
Total |
$1,500 |
$2,100 |
a. (For this question only) Suppose that ABD purchased 50% of the outstanding common shares of C for $500 cash (paid out of available cash balance; no issuance of common stock). (a) Prepare the B/S of ABD after the purchase (equity method) of investment. Assume that the market value of C’s assets at the time of purchase was $2,500 (with market value of PPE at $1,600); (b) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the purchase.
b. (Continuing from Requirement 2) Suppose that you, as a prominent financial analyst, decide to apply the proportionate consolidation on ABD’s balance sheet after the purchase of C. (a) Prepare the B/S of ABD with the proportionate consolidation; (b) Determine and explain the effect of proportionate consolidation on current ratio, long-term debt-to-equity ratio, and (3) indicate (higher, lower, or no change) & explain the effect on ROA ratio (you cannot calculate ROA due to limited information).
Solutions
Expert Solution
| Part- a. | |
| (a) Balance sheet of ABD Inc. After the purchase as on Dec. 31, 2017 | |
| Amount ($) | |
| Assets | |
| Cash (800-500) | 300 |
| Account Receivable | 0 |
| Inventory | 700 |
| Current Assets | 1,000 |
| Plant and equipment, net | 0 |
| Investment in equity of C Corp. (2,500-1500)*50% | 500 |
| Total | 1,500 |
| Accounts payable | 600 |
| Long term debt | 0 |
| Total liabilities | 600 |
| Common stock ($1 par) | 500 |
| Additional paid in capital | 100 |
| Retained earnings | 300 |
| Shareholders equity | 900 |
| Total | 1,500 |
| (b) Calculation of ratio: | |
| Current ratio = Current assets/Current liabilities | |
| = 1,000/600 = 1.67 | |
| Long term debt to equity ratio = Total liabilities/Shareholders equity | |
| = 600/900 = 0.67 | |
| Part- b. | |
| (a) Consolidated Balance sheet of ABD Inc. as on Dec. 31, 2017 | |
| Amount ($) | |
| Assets | |
| Cash (800-500) | 300 |
| Account Receivable | 450 |
| Inventory | 700 |
| Current Assets | 1,450 |
| Plant and equipment, net | 600 |
| Total | 2,050 |
| Accounts payable | 600 |
| Long term debt | 750 |
| Total liabilities | 1,350 |
| Common stock ($1 par) | 500 |
| Additional paid in capital | 100 |
| Retained earnings (300-200) | 100 |
| Shareholders equity | 700 |
| Total | 2,050 |
| (we have not considered market value of plant and equipment in this part of question as we assume that market value is given only for first part of question) | |
| (b) Calculation of ratio after proportionate consolidation: | |
| Current ratio = Current assets/Current liabilities | |
| = 1,450/600 = 2.42 | |
| Current ratio increased due to increase in current ratio and staying constant of current liabilities. | |
| Long term debt to equity ratio = Total liabilities/Shareholders equity | |
| = 1,350/700 = 1.93 | |
| Ratio has changed compared to part a because shareholders equity decreased due to goodwill generated in purchase of C Corporation. | |
ekkarill92 answered 2 years agoRelated Solutions
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2016
Cash
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Accounts receivable (net)
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23,200
Inventory
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7,500
Land
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26,000
Buildings
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Accumulated depreciation—buildings
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$119,900
Accounts payable
$ 12,300
$ 31,600
Common stock
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70,500
Retained earnings
23,300
17,800
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$110,100
$119,900
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2018
2017
Cash
$ 10,000
$ 9,000
Accounts receivable
35,000
30,000
Inventory
25,500
20,000
Land
15,000
15,000
Building
90,000
90,000
Accumulated depreciation
(27,000)
(25,000)
Total
$148,500
$139,000
Accounts payable
$ 50,000
$ 45,000
Common stock
65,000
60,000
Retained earnings
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34,000
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$148,500
$139,000
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12/31/2017
Cash
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$ 10,000
Accounts receivables (net)
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45,000
Inventory
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70,000
Land
0
32,000
Plant assets
580,000
560,000
Accumulated depreciation
(103,000)
(100,000)
$612,900
$617,000
Accounts payable
$ 90,000
$ 93,000
Salaries payable
8,000
4,000
Dividends payable
1,700
2,300
Payable for general & admin expenses
18,000
10,000
Income tax payable
9,050
...
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Corporation.
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Assets
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2021
Cash
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$ 63,800
Accounts receivable
255,200
220,400
Inventory
484,300
548,100
Land
232,000
290,000
Equipment
754,000
580,000
Accumulated depreciation—equipment
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)
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Liabilities and Stockholders’ Equity
Accounts payable
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580,000
Common stock ($1 par)
626,400
504,600
Retained earnings
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400,200
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Additional information:
1.
Net income for 2022...
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The comparative balance sheets for Rothlisberger Company as of
December 31 are presented below.
Assets
2017
2016
Cash
$58,200
$46,000
Accounts Receivable
$41,100
$63,400
Inventory
$148,900
$145,600
Prepaid Expenses
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$27,600
Land
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$133,300
Buildings
$200,200
$200,200
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$33,600
Equipment
$228,500
$155,400
Accumulated Depreciation - Equipment
$42,600
$36,300
Total
$690,900
$701,600
LIABIITIES AND STOCKHOLDERS EQUITY
Accounts Payable
$46,000
$39,700
Bonds Payable
$260,000
$293,600
Common stock, $1 Par
$193,600
$208,300
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$208,300
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$701,600...
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of December 31, Year 1 and Year 2, and the income statement for the
year ended December 31, Year 2. The statement of retained earnings
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Balance Sheets
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Year 2
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Accumulated depreciation—buildings (58,800 ) (39,200 ) Equipment
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2017
2016
Assets
Cash
$
19,000
$
20,000
Accounts receivable
78,000
72,000
Merchandise inventory
103,000
99,000
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$
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