Question

The balance sheet of Drake Enterprises as at December 31, Year 5, is as follows:
Assets
Cash .............. $ 99,000
Accounts receivable ....... 143,000
Inventory ............ 191,400
Property, plant, and equipment .... 1,692,000
Accumulated depreciation ... (900,000)
$1,225,400
Liabilities and Equity
Current liabilities ......... $ 242,000
Bonds payable ........... 352,000
Common shares (100,000 shares) ... 220,000
Retained earnings ......... 411,400
$1,225,400
Effective January 1, Year 6, Drake proposes to issue 82,500 common shares (currently trading at $20 per share) for all of the common shares of Hanson Industries. In determining the acquisition price, the management of Drake noted that Hanson Industries has unrecorded customer service contracts and directed its accounting staff to reflect this when recording the acquisition. An independent appraiser placed a value of $150,000 on this unrecorded intangible asset. Direct costs associated with the acquisition were as follows:
Costs of issuing shares ...... $44,000
Professional fees ........ 38,500
$82,500
The balance sheet of Hanson Industries as at December 31, Year 5, is as follows:
ANSWER CONTINUE TO NEXT PAGE
Hanson Industries is to be wound up after the sale.
Required:
(a) Assume that the shareholders of Hanson accept Drake's offer on the proposed date. Prepare Drake's January 1, Year 6, consolidated balance sheet after the proposed transaction occurred.
(b) Assume that Drake is a private entity, uses ASPE, and chooses to use the equity method to account for its investment in Hanson. Prepare Drake's January 1, Year 6, balance sheet after the proposed transaction occurred.
(c) Compare the balance sheets in parts (a) and (b). Which balance sheet shows the highest debt-to-equity ratio? Which balance sheet better reflects Drake's solvency risk? Briefly explain.


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  • CreatedJune 08, 2015
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