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How do I prepare a consolidated worksheet using the parent company concept?




I need help to complete requirements #3 & #4. How do I prepare a consolidated worksheet using the parent company concept?;Here are some check figures.;Sales - $927,600;Net Income - $64,425;Retained earnings 12/31/04 - $69,025;Assets - $554,005;Non-controlling Interest (income statement) - $3,880;Non-controlling Interest (balance sheet) - $41,380;Please see attached documents.;Problem Description;Main, Inc. is contemplating a tender offer to acquire 80 percent of;Subsidiary Corporation's common stock. Subsidiary's shares are currently;quoted on the New York Stock Exchange at $85 per share. In order to have;a reasonable chance of the tender offer attracting 80 percent of;Subsidiary's stock, Main believes it will have to offer at least $105;per share. If the tender offer is made and is successful, the purchase;will be consummated on January 1, 2004.;A typical part of the planning of a proposed business combination is the;preparation of projected or pro forma consolidated financial statements.;As a member of Main's accounting group, you have been asked to prepare;the pro forma 2004 consolidated financial statements for Main and;Subsidiary assuming that 80 percent of Subsidiary's stock is acquired at;a price of $105 per share. To support your computations, Dave Johnson;the chairperson of Main's acquisitions committee, has provided you with;the projected 2004 financial statements for Subsidiary. (The projected;financial statements for Subsidiary and several other companies were;prepared earlier for the acquisition committee's use in targeting a;company for acquisition.) The projected financial statements for;Subsidiary for 2004 and Main's actual 2003 financial statements are;presented in table 1.;Assumptions;Mr. Johnson has asked you to use the following assumptions to project;Main's 2004 financial statements;Sales will increase by 10 percent in 2004.;All sales will be on account.;Accounts receivable will be 5 percent lower on December 31, 2004, than;on December 31, 2003.;Cost of goods sold will increase by 9 percent in 2004.;All purchases of merchandise will be on account.;Accounts payable are expected to be $50,500 on December 31, 2004.;Inventory will be 3 percent higher on December 31, 2004, than on;December 31, 2003.;Straight-line depreciation is used for all fixed assets.;No fixed assets will be disposed of during 2004. The annual depreciation;on existing assets is $40,000 per year.;Equipment will be purchased on January 1, 2004, for $48,000 cash. The;equipment will have an estimated life of 10 years with no salvage value.;Operating expenses, other than depreciation, will increase by 14 percent;in 2004.;All operating expenses, other than depreciation, will be paid in cash.;Main's income tax rate is 40 percent, and taxes are paid in cash in four;equal payments. Payments will be made on the 15th of April, June;September, and December. For simplicity, assume taxable income equals;financial reporting income before taxes.;Main will continue the $2.50 per share annual cash dividend on its;common stock.;Main will finance the acquisition by issuing $170,000 of 6 percent;non-convertible bonds at par on January 1, 2004. The bonds would first;pay interest on July 1, 2004, and would pay interest semi-annually;thereafter each January 1 and July 1 until maturity on January 1, 2014.;The acquisition will be accounted for as a purchase and Main will;account for the investment using the equity method. Although most of the;legal work related to the acquisition will be handled by Main's staff;attorney, direct costs to prepare and process the tender offer will;total $2,000 and will be paid in cash by Main in 2004.;As of January 1, 2004, all of Subsidiary's assets and liabilities are;fairly valued except for machinery with a book value of $8,000, an;estimated fair value of $9,500, and a 5-year remaining useful life.;Assume that straight-line depreciation is used to amortize any;revaluation increment.;No transactions between these companies occurred prior to 2004.;Regardless of whether they combine, Main plans to buy $50,000 of;merchandise from Subsidiary in 2004 and will have $3,600 of these;purchases remaining in inventory on December 31, 2004. In addition;Subsidiary is expected to buy $2,400 of merchandise from Main in 2004;and to have $495 of these purchases in inventory on December 31, 2004.;Main and Subsidiary price their products to yield a 65 percent and 80;percent markup on cost, respectively.;Main intends to use three financial yardsticks to determine the;financial attractiveness of the combination. First, Main wishes to;acquire Subsidiary Corporation only if 2004 consolidated earnings per;share will be at least as high as the earnings per share Main would;report if no combination takes place. Second, Main will consider the;proposed combination unattractive if it will cause the consolidated;current ratio to fall below 2 to 1. Third, return on average;stockholders' equity must remain above 20 percent for the combined;entity.;If the financial yardsticks described above and the non-financial;aspects of the combination are appealing, then the tender offer will be;made. On the other hand, if these objectives are not met, the;acquisition will either be restructured or abandoned.;Required;1. Forecast the separate financial statements of Main, Inc. Using Ms.;Franklin's assumptions and Main's 2003 financial statements, prepare pro;forma 2004 financial statements for Main, Inc., assuming that the;acquisition is not attempted. Support your statements with appropriate;work papers and journal entries. Pro forma financial statements include;Statement of Operation, Statement of Retained Earnings, Balance Sheet;and Cash Flow Statement.;2. Adjust the separate financial statements of Main, Inc. to reflect the;proposed acquisition. Adjust Main's pro forma 2004 financial statements;prepared in #1 to reflect the proposed acquisition (i.e., adjust Main's;forecasted financial statements for bond issuance, stock purchase;income from subsidiary, etc.). Support your statements with appropriate;work papers and journal entries. Pro forma financial statements include;Statement of Operation, Statement of Retained Earnings, Balance Sheet;and Cash Flow Statement.;3. Prepare pro forma consolidated worksheet. Prepare a pro forma;consolidation worksheet for Main, Inc. and its proposed subsidiary as of;December 31, 2004. Use the adjusted pro forma 2004 financial statements;of Main, Inc. prepared in #2 and the projected 2004 financial statements;of Subsidiary Corporation in table 1. Show all consolidation adjusting;entries including minority interest entries.;4. Perform ratio analysis. Compute earnings per share for (1) the;separate financial statements of Main, Inc. prepared in #1 and (2) the;consolidated financial statements contained in the pro forma;consolidation worksheet prepared in #3. Also, calculate current ratio;and return on average stockholders' equity for the consolidated;financial statements.;Table 1;Main, Inc Actual Financial Statements for 2003 and;Subsidiary Corporation Projected Financial Statements for 2004;Main 2003 Actual Subsidiary 2004 Projected;Sales $ 800,000 $ 100,000;Cost of Goods Sold (485,000) (55,000);Operating Expenses (219,000) (10,000);Income before Taxes 96,000 35,000;Income Tax Expense (38,400) (14,000);Net Income $ 57,600 $ 21,000;Retained Earnings January 1 $ 23,000 $ 14,500;Add Net Income 57,600 21,000;Deduct Dividends (38,000) (7,000);Retained Earnings December 31 $ 42,600 $ 28,500;Cash $ 36,200 $ 19,500;Accounts Receivable 39,000 13,000;Inventory 26,000 12,000;Property, Plant and Equipment 673,000 213,000;Accumulated Depreciation (490,000) (28,000);Total Assets 284,200 229,500;Accounts Payable 44,600 21,000;Common Stock* 190,000 150,000;Paid-in Capital in Excess of Par 7,000 30,000;Retained Earnings 42,600 28,500;Total Liabilities & Equities $ 284,200 $ 229,500;*Main: $12.50 par value. Subsidiary: $75 par value


Paper#27260 | Written in 18-Jul-2015

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