Question: The balance sheets of E Ltd and J Ltd on

The balance sheets of E Ltd. and J Ltd. on December 30, Year 6, were as follows:
On December 31, Year 6, E Ltd. issued 350 shares, with a fair value of $40 each, for 70% of the outstanding shares of J Ltd. Costs involved in the acquisition, paid in cash, were as follows:
Costs of arranging the acquisition ..... $2,500
Costs of issuing shares ......... 1,600
The carrying amounts of J Ltd.’s net assets were equal to fair values on this date except for the following:
Fair value
Plant assets ..... $65,000
Long-term debt .... 40,000
E Ltd. was identified as the acquirer in the combination.
(a) Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, 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 E Ltd. under the four different theories. Explain which theory shows the strongest liquidity and sol vency position and which method best reflects the true financial condition of the company.

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