Mammoth Enterprises purchased 50 percent of the outstanding stock of Atom, Inc., on December 31 for $60,000 cash. On that date the book value of Atom’s net assets was $70,000. The market value of Atom’s assets was $180,000, $20,000 above book value. Mammoth’s con¬ densed balance sheet, immediately before the acquisition, follows. Assets Liabilities and Stockholders’ Equity Current assets $150,000 Current liabilities $ 30,000 Noncurrent assets 350,000 Long-term liabilities 200,000 Common stock 100,000 Retained earnings 170,000 _ Total liabilities and _ Total assets $500,000 stockholders’ equity $ 500,000 Mammoth entered into a debt covenant earlier in the year that requires the company to main¬ tain a debt/equity ratio of less than 1:1. REQUIRED:

a. Assume that Mammoth treats the transaction as a purchase, and compute Mammoth’s debt/equity ratio both before and after the acquisition. Consider minority interest a liabil¬ ity.

b. Explain why in this situation Mammoth would probably prefer the equity method instead of treating this transaction as a purchase and preparing consolidated financial statements.