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.

Transcribed Image Text:

P Company Book value S Company Book value Fair value $ 6,900 $6,000 Plant and equipment (net) Investment in S Company Inventory Accounts receivable Cash $ 8,100 6,960 5,160 3,150 1,500 $24,870 3,750 1,800 1,050 $13,500 3,900 1,800 1,050 Ordinary shares Retained earnings Long-term liabilities Other current liabilities Accounts payable $10,500 8,370 4,200 1,200 600 $24,870 $3,000 6,000 2,000 1,800 700 $13,500 2,000 1,800 700