The balance sheets of ABD Inc. and C Corporation on December 31, 2016 are given below:

	ABD Inc.	C Corp.
Assets
Cash	$300	$-0-
Account receivable	-0-	600
Inventory	300	-0-
Current assets	600	600
Plant & equipment, net	-0-	800
Total	$600	$1,400
Liabilities and shareholders’ equity
Account payable	$250	$-0-
Long-term debt	-0-	1,050
Total liabilities	$250	$1,050
Common stock ($1 par)	200	200
Additional paid-in capital	50	-0-
Retained earnings	100	150
Total	$600	$1,400

(Required)

Immediately following the preparation of B/S above, ABD issued 500 shares of its common stock at $1.10 per share, and used the $550 proceed to purchase 100% of the common stock of C. (a) Determine the amount of goodwill ABD should recognize for this transaction. (b) Prepare the consolidated B/S that ABD would report immediately following the investment in C. Assume that the market value of C’s asset at the time of acquisition is $1,500 (with market value of PPE at $900; for all others are the same as stated). (c) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the acquisition.

(For this question only) Suppose that ABD purchases (paid with existing cash; no issuance of stock) 50% of the outstanding common shares of C for $225. (a) Prepare the B/S of ABD after the purchase (equity method) of investment. Assume that the market value of C’s asset at the time of purchase is $1,500 (with market value of PPE at $900). (b) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the purchase.

(Continuing from Requirement 2) Suppose that you, as a prominent financial analyst, decide to apply the proportionate consolidation on ABD’s balance sheet after the purchase of C. (a) Prepare the B/S of ABD with the proportionate consolidation. (b) Determine and explain the effect of proportionate consolidation on current ratio, long-term debt-to-equity ratio, and indicate (higher, lower, or no change) and explain the effect on ROA ratio (you cannot calculate ROA due to limited information).

Answer rating: 100% (QA)

Requirement 11 Market Value of Total Assets of C Lia... View the full answer