Question

On December 31, Year 1, P Company purchased 80% of the outstanding shares of S Company for $6,960 cash. The statements of financial position of the two companies immediately after the acquisition transaction appear below.
Required:
(a) Prepare a consolidated statement of financial position at the date of acquisition under each of the following:
(i) Proprietary theory
(ii) Parent company theory
(iii) Parent company extension theory
(iv) Entity theory
(b) Calculate the current ratio and debt-to-equity ratio for P Company under the four different theories. Explain which theory shows the strongest liquidity and solvency position and which method best reflects the true financial condition of the company.


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  • CreatedJune 08, 2015
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