Ormond Co. acquired all of the outstanding common stock of Daytona Co. on January 1, 2014. Ormond Co. gave shares of its common stock with a fair value of $312 million in exchange for 100% of the Daytona Co. common stock. Daytona Co. will remain a legally separate entity after the exchange, but Ormond Co. will prepare consolidated financial statements with Daytona Co each period. Exhibit 8.26 presents the balance sheets of Ormond Co. and Daytona Co. on January 1, 2014, just after the acquisition.

The following information applies to Daytona Co.:

1. The market value of Daytona Co.'s fixed assets exceeds their book value by $50 million.

2. Daytona Co. owns a patent with a market value of $40 million.

3. Daytona Co. is a defendant in a lawsuit that it expects to settle during 2014 at a cost of $25 million. The firm carries no insurance against such lawsuits. If permitted, Ormond Co. wants to establish an acquisition reserve for this lawsuit.

4. Daytona Co. has an unrecognized and unfunded retirement health care benefits obligation totaling $20 million on January 1, 2014.

REQUIRED

a. Prepare a consolidated balance sheet for Ormond Co. and Daytona Co. on January 1, 2014. Ignore deferred tax effects. (A consolidated worksheet is not required, but recommended.)

• The test for goodwill impairment indicates that no impairment charge is necessary for 2014.

Prepare a consolidated income statement for 2014 and a consolidated balance sheet on December 31, 2014. (A consolidated worksheet is not required, but it will be illustrated in the solution.)

b. Exhibit 8.27 presents income statements and balance sheets taken from the separatecompany books at the end of 2014. The following information applies to these companies:
• The fixed assets of Daytona Co. had an average remaining life of five years on January 1, 2014. The firms use the straight-line depreciation method.
• The patent of Daytona Co. had a remaining life of ten years on January 1, 2014.
• Daytona Co. settled the lawsuit during 2014 and expects no further liability.
• Daytona Co. will amortize and fund its retirement health care benefits obligation over
20 years. It included $1 million in operating expenses during 2014 related to amounts unrecognized and unfunded as of January 1, 2014.

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Exhibit 8.26 Ormond Co. and Daytona Co Balance Sheets on January 1, 2014 amounts in millions (Problem 8.20) Ormond Co. Daytona Co. Cash Accounts receivable Investment in Daytona Fixed assets (net) Patent Deferred tax asset Goodwill S 25 60 312 250 $ 15 40 170 10 Total Assets $657 $225 Accounts payable & accruals Long-term debt Deferred tax liability Other noncurrent liabilities Common stock Retained earnings $ 60 120 40 30 392 15 $657 $ 40 60 50 75 $225 Total Liabilities and Shareholders' Equity Exhibit 8.27 Ormond Co. and Daytona Co. Income Statement and Balance Sheet for 2014 in millions) (Problem 8.20) Ormond Co. Daytona Co. Income Statement for 2014 Sales Equity in earnings of Daytona Co Operating expenses Interest expense Loss on lawsuit Income tax expense 600 30 (550) (10) $450 (395) (20) (28) $ 42 (12) S 18 Net Income Balance Sheet on December 31, 2014 Cash Accounts receivable Investment in Daytona Co. Fixed assets Patent Deferred tax asset Goodwill $ 25 50 5 45 80 339 280 195 15 Total Assets 759 270 $ 55 75 Accounts payable and accruals Long-term debt Deferred tax liability Other noncurrent liabilities Common stock Retained earmings $ 90 140 50 40 392 47 759 50 90 $270 Total Liabilities and Shareholders' Equity