Question

Growth Inc. has just acquired control of Minor Ltd. by buying 100% of Minor’s outstanding shares for $ 6,500,000 cash. The condensed SFP for Minor on the date of acquisition is shown below.
Growth is a public company. Currently, it has two bank covenants. The first requires Growth to maintain a specific debt- to- equity ratio and the second require a specific current ratio. If these covenants are violated, the bank loan will be payable on demand. Growth is in a very competitive business. To encourage its employees to stay, it has adopted a new business plan that provides managers a bonus based on a percentage of net income.
The president of Growth Inc., Teresa, has hired you, CA, to assist her with the account-ing for Minor.
To account for the acquisition, Growth’s management has had all of Minor’s capital assets appraised by two separate, independent, engineering consultants. One consultant appraised the capital assets at $ 7,800,000 in their present state. The other consultant arrived at a lower figure of $ 7,100,000, based on the assumption that imminent technological changes would soon decrease the value- in- use of Minor’s capital assets by about 10%.
The asset amount for the leased building is the discounted present value of the remaining lease payments on a warehouse that Minor leased to Growth Inc. five years ago. The lease is non- cancellable and title to the building will transfer to Growth at the end of the lease term. The lease has 15 years yet to run, and the annual lease payments are $ 500,000 per year. The interest rate implicit in the lease was 9%.
Minor’s debentures are thinly traded on the open market. Recent sales have indicated that these bonds are currently yielding about 14%. The bonds mature in 10 years.
The deferred income tax balance is the accumulated balance of CCA/ depreciation temporary differences. The management of Minor sees no likelihood of the balance being reduced in the foreseeable future, because projected capital expenditures will enter the CCA classes in amounts that will more than offset the amount of depreciation for the older assets.
The carrying value of Minor’s inventory appears to approximate replacement cost. However, an overstock of some items of finished goods may require temporary price reductions of about 10% to reduce inventory to more manageable levels.

Required
Provide a report for Teresa outlining how the assets of Minor Ltd. should be valued for pur-poses of preparing consolidated financial statements. She wants you to identify alternatives and support yourdecision.


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  • CreatedMarch 13, 2015
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