In: Accounting
Assume Dover Auto Inc. acquires all of the stock of Dover Financial Corporation. Just prior to the acquisition, their separate balance sheets are as follows:
Dover Auto Inc |
Dover Financial Corporation |
|
Total assets |
227,339,000 |
51,933,000 |
Total Liabilities |
184,562,000 |
40,933,000 |
Shareholders’ Equity |
42,777,000 |
11,000,000 |
Total Liabilities and Equity |
227,339,000 |
51,933,000 |
Assume Dover Financial Corporation’s assets and liabilities are reported at fair value. Dover Auto Inc. pays $11,000,000 in cash to Dover Financial Corporation’s shareholders for Dover Financial corporation’s assets and liabilities and then consolidates the assets and liabilities of Dover Financial Corporation with its own assets and liabilities.
Assume Dover Auto Inc. acquires all of the stock of Dover Financial Corporation. Dover Auto Inc. pays $11,000,000 in cash to Dover Financial Corporation’s shareholders.
The acquisition entry will be as follows:
Debit Credit
Business Combination/Purchase Account 11000000 To Dover Financial Corporation Account 11000000 ( Purchase the business of dover Financial)
Total Assets Account 51933000 To Total Liabilities Account 40933000 To Business Combination/ Purchase account 11000000 ( Being assets and liabilities of dover financial are recorded)
Dover Financial Corporation Account 11000000 To cash Account 11000000 ( Payment to drover financial shareolder for acquisition)
Alternatively Single entry can be made-
Total Assets Account 51933000 To Total Liabilities Account 40933000 To Cash Account 11000000 ( Being assets and liabilities of dover financial are recorded)
Consolidated Balance sheet
Particulars Amount ($)
Assets(227339000+51933000-11000000) 268272000
Total Assest 268272000
Total liabilities( 184562000+40933000) 225495000 Shareholder equity 42777000
Total Liabilities & Equity 268272000
Account as equity Transaction
Entry will be as follow Debit Credit
Investment in Drover Financial Equity Account 11000000
To Cash Account 11000000 (Being Investment in drover financial is recorded as per equity method)
Consolidated Balance sheet
Particulars Amount ($)
Assets(227339000-11000000) 216339000
Investment in Drover Financial Equity 11000000
Total Assest 227339000
Total liabilities( 184562000) 184562000 Shareholder equity 42777000
Total Liabilities & Equity 227339000
Effect on key leverage ratio of Drover Auto Inc after consolidation:
Debt/ Equity Ratio = 225495000/42777000 = 5.27:1
Debt/ Total asset Ratio = 225495000/268272000 = 0.84:1
-Report Dover Auto Inc’s leverage ratios before investment in Dover Financial Corp, Dover Auto Inc plus equity method investment, and Dover Auto Inc. with consolidation of Dover Financial Corporation
Before Cosolidation:
Debt/ Equity Ratio = 184,562,000/42,777,000 = 4.31: 1
Debt/ Total asset Ratio = 184,562,000/227,339,000 = 0.81: 1
After Cosolidation (Account as equity):
Debt/ Equity Ratio = 184,562,000/42,777,000 = 4.31: 1
Debt/ Total asset Ratio = 184,562,000/227,339,000 = 0.81: 1
After Cosolidation ( other than account as equity)
Debt/ Equity Ratio = 225495000/42777000 = 5.27:1
Debt/ Total asset Ratio = 225495000/268272000 = 0.84:1
On the calculation of above, we can conclude that-