Mammoth Enterprises purchased 50 percent of the outstanding stock of Atom Inc. on December 31 for $60,000 cash. On that date, the book value of Atom€™s net assets was $70,000. The market value of Atom€™s assets was $180,000, $20,000 above book value. Mammoth€™s condensed balance sheet, immediately before the acquisition, follows:

Mammoth entered into a debt covenant earlier in the year that requires the company to maintain a debt/ equity ratio of less than 1:1.

REQUIRED:
a. Compute Mammoth€™s debt/equity ratio both before and after the acquisition. Consider non-controlling a liability. Do a consolidation even though Mammoth only purchased 50 percent of the steel.
b. Explain why in this situation Mammoth would probably prefer the equity method instead of treating this transaction as a purchase and preparing consolidated financial statements.

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Liabilities and Shareholders' Equity Current liabilities Assets Current assets $ 30,000 $150,000 Long-term liabilities Common stock Retained earnings Total liabilities and shareholders' equity Noncurrent assets 350,000 200,000 100,000 170,000 Total assets $500,000 $500,000