ACCT559Course Project

Week part 2

Adjust the separate financial statements of Parent Inc. to reflect the proposed acquisition. Adjust Parent's pro forma 2019 financial statements prepared in Milestone 1 to reflect the proposed acquisition (i.e., adjust Parent'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 a statement of operation, a statement of retained earnings, a balance sheet, and a cash flow statement.

Prepare a pro forma consolidated worksheet. Prepare a pro forma consolidation worksheet for Parent Inc. and its proposed subsidiary as of December 31, 2019. To ensure you are starting with the right numbers, use the solution provided to Milestone 1 for the adjusted pro forma 2019 financial statements of Parent Inc., and the projected 2019 financial statements of Subsidiary Corporation in Table 1. Show all consolidation adjusting entries, including minority interest entries.

Week part 3

4. Perform ratio analysis. Compute earnings per share for (1) the separate financial statements of Parent Inc. prepared in Milestone 1 and (2) the consolidated financial statements contained in the solution for the pro forma consolidation worksheet prepared in Milestone 3. Also, calculate current ratio and return on average stockholders' equity for the separate company and consolidated financial statements.
5. Write a memorandum (as a Word document) to Ms. Franklin summarizing the results of your analysis, including a summary of the financial ratios you computed and your recommendation. Attach copies of both sets of pro forma financial statements of Parent Inc. and the pro forma consolidation worksheet.

Franklin has asked you to use the assumptions below to project Parent's 2019 financial statements:

1. Sales will increase by 10% in 2019.
2. All sales will be on account.

3. Accounts receivable will be 5% lower on December 31, 2019, than on December 31, 2018.

4. Cost of goods sold will increase by 9% in 2019.

5. All purchases of merchandise will be on account.

6. Accounts payable is expected to be $50,500 on December 31, 2019.

7. Inventory will be 3% higher on December 31, 2019 than on December 31, 2018.

8. Straight-line depreciation is used for all fixed assets.

9. No fixed assets will be disposed of during 2019. The annual depreciation on existing assets is $40,000 per year.

10. Equipment will be purchased on January 1, 2019, for $48,000 cash. The equipment will have an estimated life of 10 years, with no salvage value.

11. Operating expenses, other than depreciation, will increase by 14% in 2019.

12. All operating expenses, other than depreciation, will be paid in cash.

13. Parent's income tax rate is 40%, 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.

14. Parent will continue the $2.50 per share annual cash dividend on its common stock.

15. If the tender offer is successful, Parent will finance the acquisition by issuing $170,000 of 6% nonconvertible bonds at par on January 1, 2019. The bonds would first pay interest on July 1, 2019 and would pay interest semi annually thereafter each January 1 and July 1 until maturity on January 1, 2029.

16. This business combination will be recorded using acquisition method and Parent will account for the investment using the equity method. Although most of the legal work related to the acquisition will be handled by Parent's staff attorney, direct costs to prepare and process the tender offer will total $2,000 and will be paid in cash by Parent in 2019.

As of January 1, 2019, 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 2019. Regardless of whether they combine, Parent plans to buy $50,000 of merchandise from Subsidiary in 2019 and will have $3,600 of these purchases remaining in inventory on December 31, 2019. In addition, Subsidiary is expected to buy $2,400 of merchandise from Parent in 2019 and to have $495 of these purchases in inventory on December 31, 2019. Parent and Subsidiary price their products to yield a 65% and 80% markup on cost, respectively.

Parent intends to use three financial yardsticks to determine the financial attractiveness of the combination. First, Parent wishes to acquire Subsidiary Corporation only if 2019 consolidated earnings per share will be at least as high as the earnings per share Parent would report if no combination takes place. Second, Parent will consider the proposed combination unattractive if it will cause the consolidated current ratio to fall below two to one. Third, return on average stockholders' equity must remain above 20% for the combined entity.

If the financial yardsticks described above and the nonfinancial 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.

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Parent Inc. Actual Financial Statements for 2012 and Subsidiary Corporation Projected Financial Statements for 2013

	Parent 2012 Actual	Subsidiary 2013 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
Less: dividends	(38,000)	(7,000)
Retained earnings, December 31	42,600	28,500