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 some Goodwill. The tender offer will be completed on January 1, 2024.

As CFO of The Green Company, you have been asked to prepare and analyze the pro forma 2024 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 2024 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 2024 and Green Company's actual 2023 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, 2024, to help make that decision. She has asked you to use the following assumptions to project Green Company's 2024 financial statements:

2. All sales will be on account and are expected to increase by 10% in 2024.
4. Accounts receivable will be 4% lower on December 31, 2024, than on December 31, 2023.
6. All purchase of merchandise will be on account.
8. Cost of goods sold will increase by 12% in 2024.
10. Accounts payable are expected to be $15,000 on December 31, 2024.
12. Inventory will be 3% higher on December 31, 2024, than on December 31, 2023.
14. Straight line depreciation is used for all fixed assets.
16. No fixed assets will be disposed of during 2024. The annual depreciation of existing assets is $30,000 per year.
18. Equipment will be purchase on January 1, 2024, for $24,000 cash. The equipment will have an estimated life of 4 years with no salvage value.
20. Operating expenses, other than depreciation, will increase by 8% in 2024.
22. All operation expenses, other than depreciation, will be paid in cash.
24. Green Company's income tax rate is 30% and taxes are paid in cash in four equal payments. Payments will be made on the 15^th of April, June, September, and December. For simplicity, assume taxable income equals financial reporting income before taxes.
26. Green Company will continue to pay $19,000 in dividends for 2024 on its common stock shares.

If the tender offer is successful, Green Company will finance the acquisition by issuing $120,000 of 4% convertible bonds at par on January 1, 2024. 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, 2024, and would pay interest semiannual thereafter each January 1 and July 1 until maturity on January 1, 2034. It is estimated that the AA corporate bond yield will be 4% 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 $12,000 and will be paid in cash by Green Company in 2024. As of January 1, 2024, 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 $7,000 and a 4-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 2024 projected 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 16% for the combined entity.

If the three financial yardsticks 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.

Required:

1. Forecast the separate financial statements of Green Company.Using Ms. Lake's assumptions and Green's 2023 financial statements, prepare pro forma 2024 financial statements for Green Company assuming that the acquisition is not attempted.

1. Adjust the separate financial statements of Green Company to reflect the proposed acquisition of Red Co. on January 1, 2024. Adjust Green Company's pro forma 2024 financial statements prepared in Project #1 above to reflect the proposed acquisition on January 1^st (i.e., adjust Green's forecasted financial statements for bond issuance, and stock purchase.) During 2024, assume Red's Net Income will be $10,500 and Red will pay Dividends to Green of $3,500. Assume Green uses the equity method to account for its ownership in Red Company.

1. Try to resolve a pro forma consolidated worksheet. Prepare a pro forma consolidation worksheet for Green Company and its proposed subsidiary as of December 31, 2024. Use the adjusted pro forma 2024 financial statements of Green Company prepared in #2 above and the projected 2024 financial statements of Red Company in Table 1.

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.

1. Write a memorandum to Ms. Lake. Write a memorandum to Ms. Lake summarizing the results of your analysis and your recommendation, 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 2023 and

Red Company - Forecasted Financial Statement for 2024

				Green Company			Red Company
				2023			2024
				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: $8.50 par value. Red Company: 10,000 shares outstanding at $7.50 par