Question 4

Part A:

Two entities had the following balance sheet accounts as of December 31, 20X1 (in millions):

	A	B		A	B
Cash + other assets	$900	$360	Liabilities	$150	$60
			Stockholders equity	$750	$300

On December 31, 20X1, Company A purchased all the shares of B for $300 million. The book and fair value of all assets and liabilities are the same.

For 20X2, Company B's revenues and expenses were $180 and $120 million, respectively, and Company A's revenues and expenses on its other operations (that is, excluding B) were $280 and $180 million, respectively.

1. Prepare a consolidated balance sheet immediately after the acquisition. (Use balance sheet equation format.)
2. What is the net income of the consolidated entity for 20X2? Assume zero taxes.

Part B:

Two entities had the following balance sheet accounts as of December 31, 20X1 (in millions):

	A	B		A	B
Cash + other assets	$900	$360	Liabilities	$150	$60
			Stockholders equity	$750	$300

On December 31, 20X1, Company A purchased all the shares of B for $540 million. The equipment acquired through the acquisition had book value of $120 million and fair value of $300 million. The book and fair value of other assets and liabilities are the same.

For 20X2, Company B's revenues and expenses were $180 and $120 million, respectively, and Company A's revenues and expenses on its other operations (that is, excluding B) were $280 and $180 million, respectively.

1. Prepare a consolidated balance sheet immediately after the acquisition. (Use balance sheet equation format.)
2. What is the net income of the consolidated entity for 20X2 given that the equipment had remaining useful life of four years and straight line depreciation method is used? Assume zero taxes.