The Green Company has been in negotiation with The Red Company to acquire 100% of the Red Company's common stock. Both companies are currently listed on a major stock exchange. Green Company's stock trades for $60 a share and Red Company's stock trades for $8 per share. Green Company plans to offer $12 per share for Red's stock in order to get all of Red's shareholders to sell their current shares. If the tender offer goes through, it will result in $14,750 of Goodwill. The tender offer will be completed on January 1, 2021.

As CFO of The Green Company, you have been asked to prepare and analyze the pro forma 2021 consolidated financial statements for The Green Company and The Red Company assuming that 100% of the Red Company's stock will be acquired at a price of $12 per share. Ms. Frankie Lake, the chairperson of Green Company's acquisition committee, has provided you with the projected 2021 financial statements for The Red Company. (The projected financial statements for The Red Company and several other companies were prepared earlier for the acquisition committee's use in targeting a company for acquisition). The projected financial statements for Red Company for 2021 and Green Company's actual 2020 financial statements are presented in Table 1. Ms. Lake needs your help to make a decision about this possible acquisition. She wants to prepare a proposed set of consolidated financial statements for the year ended December 31, 2021 to help make that decision. She has asked you to use the following assumptions to project Green Company's 2021 financial statements:

All sales will be on account and are expected to increase by 12% in 2021.

Accounts receivable will be 5% lower on December 31, 2021 than on December 31, 2020.

All purchase of merchandise will be on account.

Cost of goods sold will increase by 10% in 2021.

Accounts payable are expected to be $25,000 on December 31, 2021.

Inventory will be 3% higher on December 31, 2021 than on December 31, 2020.

Straight line depreciation is used for all fixed assets.

No fixed assets will be disposed of during 2021. The annual depreciation of existing assets is $20,000 per year.

Equipment will be purchase on January 1, 2021 for $30,000 cash. The equipment will have an estimated life of 10 years with no salvage value.

Operating expenses, other than depreciation, will increase by 10% in 2021.

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

Green Company'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.

Green Company will continue the $1.00 per share annual cash dividend on its common stock.

If the tender offer is successful, Green Company will finance the acquisition by issuing $120,000 of 3% convertible bonds at par on January 1, 2021. Each $1,000 bond would be convertible into 4 shares of Green Company's common stock. The bonds would first pay interest on July 1, 2021 and would pay interest semiannual thereafter each January 1 and July 1 until maturity on January 1, 2031 it is estimated that the AA corporate bond yield will be 3% when the bonds are issued.

The acquisition will be accounted for using the "acquisition method" [see ASC 805 Business Combinations.]** Although most of the legal work related to the acquisition will be handled by the Green Company's staff attorney, direct costs to prepare and process the tender offer will total $2,000 and will be paid in cash by Green Company in 2021. As of the January 1, 2021 all of Red Company's assets and liabilities are fairly valued except for machinery with a book value of $4,000 and an estimated fair value of $5,000 and a 5 year remaining useful life. Assume that straight-line depreciation is used to amortize any revaluation increment.

Green Company intends to use three financial yardsticks to determine the financial attractiveness of the combination. First, Green Company wishes to acquire Red Company only if 2021 consolidated earnings per share will be at least as high as the earning per share Green Company would report if no combination had taken place. If multiple earnings per share disclosures are required, management will base this decision on fully diluted earnings per share. Second, Green Company will consider the proposed combination unattractive if it will cause the consolidated current ratio to fall below 2 to 1. Third, return on average stockholder's equity must remain above 20% for the combined entity.

If the financial yardstick 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 made, the acquisition will either be restructured or abandoned.

**

https://www.iasplus.com/en-us/standards/fasb/broad-transactions/asc805

Required:

Forecast the separate financial statements of Green Company. Using Ms. Lake's assumptions and Green's 2020 financial statements, prepare pro forma 2021 financial statements for Green Company assuming that the acquisition is not attempted.

Adjust the separate financial statements of Green Company to reflect the proposed acquisition. Adjust Green Company's pro forma 2021 financial statements prepared in #1 above to reflect the proposed acquisition (i.e., adjust Green's forecasted financial statements for bond issuance, stock purchase, income from Red Company, etc.)

Prepare pro forma consolidated worksheet. Prepare a pro forma consolidation worksheet for Green Company and its proposed subsidiary as of December 31, 2021. Use the adjusted pro forma 2021 financial statements of Green Company prepared in #2 above and the projected 2021 financial statements of Red Company in Table 1.

Perform ratio analysis. Compute earning per share for (1) the separate financial statements of Green Company prepared in #1 above and (2) the consolidated financial statements contained in the pro forma consolidation worksheet prepared in #3 above. Also calculate current ratio and return on average stockholder's equity for the consolidated financial statements.

Write a memorandum to Ms. Lake. Write a memorandum to Ms. Lake summarizing the results of your analysis, including a summary of the financial ratios you computed. Attach copies of both sets of pro forma financial statements of Green Company and the pro forma consolidation worksheet.

Table 1

Green Company - Actual financial statements for 2020 and

Red Company - Projected Financial Statement for 2021

Green Company Red Company

2020 2021

Actual: Projected:

Sales

$ 400,000 $50,000

Cost of Goods Sold

(243,000) (27,500)

Operating Expenses

(110,000) (5,000)

Income Before Taxes

$47,000 $17,500

Income Tax Expenses

(18,800) (7,000)

Net Income

$28,200 $10,500

Retained Earnings

January 1

$21,500 $7,250

Add Net Income

28,200 10,500

Deduct Dividends

(19,000) (3,500)

Retained Earnings

December 31

$30,700 $14,250

Cash

$18,100 $9,750

Accounts Receivable

18,500 6,500

Inventory

13,000 6,000

Property, Plant and Equipment

336,500 106,500

Accumulated Depreciation

(245,000) (14,000)

Total Assets

$141,100 $114,750

Accounts Payable

$21,900 $10,500

Common Stock*

85,000 75,000

Paid-in Capital in Excess in Par

3,500 15,000

Retained Earnings

30,700 14,250

Total Equities and Liabilities

$141,100 $114,750

* Green Company: $6.50 par value. Red Company: 10,000 shares outstanding at $7.50 par