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The balance sheet of Drake Enterprises as at December 31, Year 5, is as follows: Assets Cash $ 99,000 Accounts receivable 143,000 Inventory 191,400 Property,

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The balance sheet of Drake Enterprises as at December 31, Year 5, is as follows: Assets Cash $ 99,000 Accounts receivable 143,000 Inventory 191,400 Property, plant, and equipment 1,692,000 Accumulated depreciation (900,000) $1,225,400 Liabilities and Equity Current liabilities $ 242,000 Bonds payable 352,000 Common shares ( 100,000 shares) 220,000 Retained earnings 411,400 $1,225,400 Effective January 1, Year 6, Drake proposes to issue 82,500 common shares (currently trading at $20 per share) for all of the common shares of Hanson Industries. In determining the acquisition price, the management of Drake noted that Hanson Industries has unrecorded customer service contracts and directed its accounting staff to reflect this when recording the acquisition. An independent appraiser placed a value of $150,000 on this unrecorded intangible asset. Direct costs associated with the acquisition were as follows: Costs of issuing shares $44,000 Professional fees 38,500 $82,500The balance sheet of Hanson Industries as at December 31, Year 5, is as follows: Carrying Amount Fair Value Cash $ 55,000 55,000 Accounts receivable 275,000 280,500 Inventory 187,000 178,200 Property, plant, and equipment 1,169,000 1,017,500 Accumulated depreciation (300,000) $1,386,000 Current liabilities $ 137,500 137,500 Liability for warranties 99,000 129,800 Common shares 660,000 Retained earnings 489,500 $ 1,386,000 Hanson Industries is to be wound up after the sale. Page 144 Required (a) Assume that the shareholders of Hanson accept Drake's offer on the proposed date. Prepare Drake's January 1, Year 6, consolidated balance sheet after the proposed transaction occurred. (b) Assume that Drake is a private entity, uses ASPE, and chooses to use the equity method to account for its investment in Hanson. Prepare Drake's January 1, Year 6, balance sheet after the proposed transaction occurred. (c) Compare the balance sheets in parts (a) and (b). Which balance sheet shows the highest debt-to-equity ratio? Which balance sheet better reflects Drake's solvency risk? Briefly explain. (d) Prepare Drake's consolidated balance sheet after the proposed transaction occurred using the worksheet approach

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