Business Finance
Corporate Consolidation Project

Question Description

I’m studying and need help with a Accounting question to help me learn.

Objectives

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The objective of the Corporate Consolidation Project is to provide students with an in-depth, hands-on experience examining a real-world scenario. Students will address the following primary areas.

Using actual financial results for the recently completed year and a set of assumptions, forecast proposed parent company financial results for the upcoming year assuming the acquisition is not attempted.

Develop a set of revised, forecasted, separate financial statements for the parent company that reflect the proposed acquisition.

Prepare a pro forma consolidation worksheet for the parent company and its proposed subsidiary.

Perform ratio analysis based on (1) the separate financial statements and (2) the consolidated financial statements.

Articulate findings, conclusions, and a recommendation in a memorandum to the chairperson of the parent company's acquisition committee.

Overview

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The Course Project is to be done in teams that will be assigned by the instructor during Week 1 of the course to solve a Case Study, which is listed below. The team will work together in private discussions assigned by the instructor and located in letter-designated areas (A, B, …)included in the Team Café link just below Week 8.

There are three threads in each letter group that correspond to the three required milestones.

Milestone 1—Required 1—due Week 3 (30 points)

Milestone 2—Required 2 and 3—due Week 5 (70 points)

Milestone 3—Required 4 and 5—due Week 6 (50 points)

The team will choose a leader to be responsible for posting the team’s document(s) to that person's Dropbox for the appropriate week. In addition to the private Discussion areas, teams have private Doc Sharing and e-mail to facilitate project activities. Only one team submission is to be made; each person does not submit his or her own milestone.

Please note: Any communication that occurs outside the Team Café will not be visible to me, thus it will not earn you points towards the individual participation component of each milestone's grade.

Although this is a group project, it is required that each team member play a meaningful role in completing each milestone. You should review the grading rubric found at the bottom of the page, because it will be used to grade each submission and individual participation component of each milestone. Each individual will receive a separate grade dependent on both the submission and his or her participation. Note also that participation in the team thread does not count toward your required weekly discussion logins and posts, but it will count toward your individual team grade.

Dropbox

For instructions on how to use the Dropbox, read these step-by-step instructions or watch this Tutorial Dropbox Tutorial.

Once you have been assigned to a group, go to the e-mail tool and note the group number/name in the address box. If you click on the group, then "add," you will see the names of your group members in the box. Go ahead and send an e-mail to say hello to your teammates and tell them a bit about yourself. 

At the bottom of the left side of your screen, under the Week 8 tab, you will find a Team Café, and if you click on this you will see a Discussion area for your team. This Discussion area will be open for the entire duration of the course, so I highly recommend that you keep your conversation with your team in this area. You will not be inundated with e-mails during the course, and you will not have to archive these to keep track of who is doing what.

Teams are to begin working on Milestone 1 using your team thread in Team Café—see the Course Project Guidelines in Doc Sharing for specifics. Also, please let me know if you have not heard from a member of your group early in the course.

Good luck and enjoy!

Situation

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Parent Inc. is contemplating a tender offer to acquire 80% of Subsidiary Corporation's common stock. Subsidiary's shares are currently quoted on the New York Stock Exchange at $85 per share. In order to have a reasonable chance of the tender offer attracting 80% of Subsidiary's stock, Parent believes it will have to offer at least $105 per share. If the tender offer is made and is successful, the purchase will be consummated on January 1, 2013.

A typical part of the planning of a proposed business combination is the preparation of projected or pro forma consolidated financial statements. As a member of Parent's accounting group, you have been asked to prepare the pro forma 2013 consolidated financial statements for Parent and Subsidiary assuming that 80% of Subsidiary's stock is acquired at a price of $105 per share. To support your computations, Martha Franklin, the chairperson of Parent's acquisitions committee, has provided you with the projected 2013 financial statements for Subsidiary. (The projected financial statements for Subsidiary and several other companies were prepared earlier for the acquisition committee's use in targeting a company for acquisition.) The projected financial statements for Subsidiary for 2013 and Parent's actual 2012 financial statements are presented in Table 1.

Assumptions

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Ms. Franklin has asked you to use the assumptions below to project Parent's 2013 financial statements.

Sales will increase by 10% in 2013.

All sales will be on account.

Accounts receivable will be 5% lower on December 31, 2013, than on December 31, 2012.

Cost of goods sold will increase by 9% in 2013.

All purchases of merchandise will be on account.

Accounts payable are expected to be $50,500 on December 31, 2013.

Inventory will be 3% higher on December 31, 2013, than on December 31, 2012.

Straight-line depreciation is used for all fixed assets.

No fixed assets will be disposed of during 2013. The annual depreciation on existing assets is $40,000 per year.

Equipment will be purchased on January 1, 2013, for $48,000 cash. The equipment will have an estimated life of 10 years, with no salvage value.

Operating expenses, other than depreciation, will increase by 14% in 2013.

All operating expenses, other than depreciation, will be paid in cash.

Parent's income tax rate is 40%, and taxes are paid in cash in four equal payments. Payments will be made on the 15th of April, June, September, and December. For simplicity, assume taxable income equals financial reporting income before taxes.

Parent will continue the $2.50 per share annual cash dividend on its common stock.

If the tender offer is successful, Parent will finance the acquisition by issuing $170,000 of 6% nonconvertible bonds at par on January 1, 2013. The bonds would first pay interest on July 1, 2013, and would pay interest semiannually thereafter each January 1 and July 1 until maturity on January 1, 2023.

The acquisition will be accounted for as a purchase and Parent will account for the investment using the equity method. Although most of the legal work related to the acquisition will be handled by Parent's staff attorney, direct costs to prepare and process the tender offer will total $2,000 and will be paid in cash by Parent in 2013.

As of January 1, 2013, all of Subsidiary's assets and liabilities are fairly valued except for machinery with a book value of $8,000, an estimated fair value of $9,500, and a 5-year remaining useful life. Assume that straight-line depreciation is used to amortize any revaluation increment.

No transactions between these companies occurred prior to 2013. Regardless of whether they combine, Parent plans to buy $50,000 of merchandise from Subsidiary in 2013 and will have $3,600 of these purchases remaining in inventory on December 31, 2013. In addition, Subsidiary is expected to buy $2,400 of merchandise from Parent in 2013 and to have $495 of these purchases in inventory on December 31, 2013. Parent and Subsidiary price their products to yield a 65% and 80% markup on cost, respectively.

Parent intends to use three financial yardsticks to determine the financial attractiveness of the combination. First, Parent wishes to acquire Subsidiary Corporation only if 2013 consolidated earnings per share will be at least as high as the earnings per share Parent would report if no combination takes place. Second, Parent will consider the proposed combination unattractive if it will cause the consolidated current ratio to fall below two to one. Third, return on average stockholders' equity must remain above 20% for the combined entity.

If the financial yardsticks described above and the nonfinancial aspects of the combination are appealing, then the tender offer will be made. On the other hand, if these objectives are not met, the acquisition will either be restructured or abandoned.

Table 1

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Parent Inc. Actual Financial Statements for 2012 and

Subsidiary Corporation Projected Financial Statements for 2013

  Parent 2012 Actual Subsidiary 2013 Projected

Sales $800,000 $100,000

Cost of goods sold (485,000) (55,000)

Operating expenses (219,000) (10,000)

Income before taxes 96,000 35,000

Income tax expense (38,400) (14,000)

Net income 57,600 21,000

     

Retained earnings, January 1 23,000 14,500

Add; net income 57,600 21,000

Less: dividends (38,000) (7,000)

Retained earnings, December 31 42,600 28,500

     

Cash 36,200 19,500

Accounts receivable 39,000 13,000

Inventory 26,000 12,000

Property, plant, and equipment 673,000 213,000

Accumulated depreciation (490,000) (28,000)

Total assets 284,200 229,500

  Parent 2012 Actual Subsidiary 2013 Projected

Accounts payable 44,600 21,000

Common stock * 190,000 150,000

Paid-in capital in excess of par 7,000 30,000

Retained earnings 42,600 28,500

Total liabilities and stockholders' equity 284,200 229,500

     

* Parent: $12.50 par; Subsidiary: $75 par    

Milestones

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MilestoneDueRequirements

1 (30 points) Week 3

Forecast the separate financial statements of Parent Inc. Using Ms. Franklin's assumptions and Parent's 2012 financial statements, prepare pro forma 2013 financial statements for Parent Inc., assuming that the acquisition is not attempted. Support your statements with appropriate work papers and journal entries. Pro forma financial statements include a statement of operation, a statement of retained earnings, a balance sheet, and a cash flow statement.

NOTE: There is a Template for Milestones 1 and 2 available for your download that is also located in Doc Sharing.

2 (70 points) Week 5

Adjust the separate financial statements of Parent Inc. to reflect the proposed acquisition. Adjust Parent's pro forma 2013 financial statements prepared in Milestone 1 to reflect the proposed acquisition (i.e., adjust Parent's forecasted financial statements for bond issuance, stock purchase, income from subsidiary, etc.). Support your statements with appropriate work papers and journal entries. Pro forma financial statements include a statement of operation, a statement of retained earnings, a balance sheet, and a cash flow statement.

Prepare a pro forma consolidated worksheet. Prepare a pro forma consolidation worksheet for Parent Inc. and its proposed subsidiary as of December 31, 2013. To ensure you are starting with the right numbers, use the solution provided to Milestone 1 for the adjusted pro forma 2013 financial statements of Parent Inc., and the projected 2013 financial statements of Subsidiary Corporation in Table 1. Show all consolidation adjusting entries, including minority interest entries.

NOTE: There is a Template for Milestones 1 and 2 available for your download that is also located in Doc Sharing.

3 (50 points) Week 6

Perform ratio analysis. Compute earnings per share for (1) the separate financial statements of Parent Inc. prepared in Milestone 1 and (2) the consolidated financial statements contained in the solution for the pro forma consolidation worksheet prepared in Milestone 3. Also, calculate current ratio and return on average stockholders' equity for the separate company and consolidated financial statements.

Write a memorandum (as a Word document) to Ms. Franklin summarizing the results of your analysis, including a summary of the financial ratios you computed and your recommendation. Attach copies of both sets of pro forma financial statements of Parent Inc. and the pro forma consolidation worksheet.

Grading Rubrics

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The following grading rubric will be used to determine each individual’s total grade on each project milestone. Contributory content is defined as providing input into the creation of a component, with appropriate, relevant commentary on another’s posted content or discussion on technical questions related to the requirements of each particular course milestone. Grading will occur in a two-step process. The submission itself will be graded for technical and format and appearance components as follows.

Total Points: Milestone 1 = 30; Milestone 2 = 70; Milestone 3 = 50

CriterionUnsatisfactory (less than 40% of available content points) Needs Improvement (40–69% of available content points) Meets Requirements (70–100% of available content points)

Content, Calculation, and Technical Accounting 

80% of total points

Content is incomplete or omits significant requirements.

Major points are not clear and/or persuasive. Does not indicate a basic understanding of chapter concepts. Overall application of accounting theory visible but individual supporting calculations incorrect. Major adjustments are addressed but do not appear supported. Minor theoretical errors. Appropriate application of accounting theory, correct supporting calculations, appropriate journal entries

Criterion Unsatisfactory (less than 10% of available format points) Needs improvement (10–49% of available format points) Meets requirements (50–100% of available format points)

Format and Appearance

20% of total points Not submitted in appropriate format (Excel for Milestones 1 and 2, Word or Excel for Milestone 3)

No apparent attempt to format for readability. Hard to follow/determine answer. No conclusion or indication of where to find the answer/conclusion for each requirement. Not a professional submission. Data just “typed” without any organization or format. No “white space” or graphics/formatting.

Unable to clearly identify where the answer to each problem requirement is presented. Submission appropriate to present in a business or professional context. Excellent use of graphics, formatting, and labeling.

Answer to each problem requirement clearly indicated and analysis clearly displayed

Then, based upon the individual’s contribution in the Team Café consideration for the individual component of the grade will be given as follows.

NOTE: Upon review of the Team Café Discussion area, if a team member has not posted any contributory content to the project, then no points for the milestone will be earned.

Individual Participation  

Six or more Contributory PostsFull individual participation credit

3–6 Contributory PostsLoss of 15–25% of available milestone points

1–3 Contributory PostsLoss of 26–50% of available milestone points

Grading example:

Group A submits the third milestone and earns 50 points based upon the actual content and presentation of the submission. Per review of the Team Café, it appears that one student, John Joe, posted only three times during the preparation of this milestone. The content of those posts was contributory. Based upon review of the actual content of his posts, John Joe can expect to earn between a 25 and 37 score for his participation in the Milestone 1 submission of Group A.

Week_1_acct559_JTweek1.xls 



Unformatted Attachment Preview

Problem 1-28 This template can be used to complete the identified problem. Note that "??" indicates you should fill in an appropriate answ Schedule 1: Allocation of acquisition price and related amortization Acquisition price ($400,000 X 40%) Payment in excess of book value $ $ 210,000 160,000 50,000 Excess payment identified with specific assets Amount Life (Yrs) 16,000 10 $34,000 20 Building ($40,000 X 40%) Royalty Agreement ($85,000 X 40%) Total Annual Amortization Annual Amortization $1,600 $1,700.00 $3,300.00 Schedule 2: Deferral of Unrealized Gain – 2012 Inventory remaining at end of year Gross profit percentage ($30,000 / $90,000) Gross profit remaining in inventory Ownership % Unrealized gain to be deferred until 2013 $15,000.00 x 33 1/3 % $5,000 40% $2,000 Schedule 3: Deferral of Unrealized Gain – 2013 Inventory remaining at end of year (30%) Gross profit percentage ($30,000/ $80,000) Gross profit remaining in inventory Ownership percentage Unrealized gain to be deferred until 2014 $ Journal Entries (note all entries should have an appropriate description) Date Account 1/1/2008 Investment in Stokes Co. Cash DR 210,000 CR 210,000 (To record initial investment) During 2008 Cash investment in Stokes Co. ….. 4,000 4,000 24,000 X 37 1/2 % $9,000 40% $3,600 (To record receipt of divident : $10,000 x 40%) 12/31/2012 Equity in Stokes Income - Loss Extraordinary loss of stokes…. Investment in Stokes Co. 16,000 8,000 24,000 (To record accrual of income as earned by equity investee, 40% of reported balances) 12/31/2012 Equity in stokes income - lossInvestment in Stokes Co. 3,300 3,300 (to record amortization relating to acquisition of Stokes - see schedule 1 below) 12/31/2012 Equity in Stokes Income - Loss Investment in Stokes Co….. 2,000 2,000 (To defer unrealized gross profit on intra - entitity sale see schedule 2 below) During 2013 Cash Investment in Stokes Co. 4,800 4,800 (to record receipt of divident : $12,000 x 40%) 12/31/2013 Investment in Stokes Co.. Equity in Stokes Income 16,000 12/31/2013 Equity in Stokes Income Investment in Stokes Co. 3,300 16,000 3,300 (To record amortization relating to acquisition of stokes ) 12/31/2013 Investment in Stokes Co. Equity in Stokes Income 2,000 2,000 s 12/31/2013 Equity in Stokes Income Investment in Stokes Co. 3,600 3,600 (To defer unrealized gross profit on intra-entity sale- see schedule 3 below) hould fill in an appropriate answer. Problem 1-30 This template can be used to complete the identified problem. Note that "??" indicates you should fill in an appropriate answ Schedule 1: Acquisition Price Allocation and Amortization Acquisition price Book value acquired Payment in excess of book value $900,000.00 $560,000.00 340,000 Excess payment identified with specific assets: Equipment (150,000 X 35%) Copyright Goodwill Total annual amortization Amount $52,500 $227,500 60,000 Life 7 5 ?? Annual Amortization 7500 45,000 60,000 $ 112,500 Schedule 2: Deferral of Unrealized Intercompany Gain Inventory remaining at year end Gross profit percentage Total markup Investor Ownership Percentage Unrealized intercompany gain ?? 40% #VALUE! 35% ?? Equity Income – 2011 Basic Equity (income) accrual Amortization Equity Income – 2011 $96,250.00 -$26,500.00 69,750 Part a. Equity Income – 2012 Basic Equity (income) accrual Amortization Deferral of unrealized gain Equity Income – 2012 Equity Income – 2013 Basic Equity (income) accrual Amortization Recognition of deferred gain Equity Income – 2013 $ 201,250.00 -$62,800.00 $60,000.00 $198,450.00 $217,000.00 -$53,000.00 $9,800.00 $173,800.00 Part b. Acquisition price 2011 Equity Income 2011 Dividends received 2012 Equity Income 2012 Dividends received 2013 Equity Income 2013 Dividends received Investment in Miller – 12/31/13 ?? ?? (??) ?? (??) ?? (??) 0 should fill in an appropriate answer. Problem 1-28 This template can be used to complete the identified problem. Note that "??" indicates you should fill in an appropriate answ Schedule 1: Allocation of acquisition price and related amortization Acquisition price ($400,000 X 40%) Payment in excess of book value $ $ 210,000 160,000 50,000 Excess payment identified with specific assets Amount Life (Yrs) 16,000 10 $34,000 20 Building ($40,000 X 40%) Royalty Agreement ($85,000 X 40%) Total Annual Amortization Annual Amortization $1,600 $1,700.00 $3,300.00 Schedule 2: Deferral of Unrealized Gain – 2012 Inventory remaining at end of year Gross profit percentage ($30,000 / $90,000) Gross profit remaining in inventory Ownership % Unrealized gain to be deferred until 2013 $15,000.00 x 33 1/3 % $5,000 40% $2,000 Schedule 3: Deferral of Unrealized Gain – 2013 Inventory remaining at end of year (30%) Gross profit percentage ($30,000/ $80,000) Gross profit remaining in inventory Ownership percentage Unrealized gain to be deferred until 2014 $ Journal Entries (note all entries should have an appropriate description) Date Account 1/1/2008 Investment in Stokes Co. Cash DR 210,000 CR 210,000 (To record initial investment) During 2008 Cash investment in Stokes Co. ….. 4,000 4,000 24,000 X 37 1/2 % $9,000 40% $3,600 (To record receipt of divident : $10,000 x 40%) 12/31/2012 Equity in Stokes Income - Loss Extraordinary loss of stokes…. Investment in Stokes Co. 16,000 8,000 24,000 (To record accrual of income as earned by equity investee, 40% of reported balances) 12/31/2012 Equity in stokes income - lossInvestment in Stokes Co. 3,300 3,300 (to record amortization relating to acquisition of Stokes - see schedule 1 below) 12/31/2012 Equity in Stokes Income - Loss Investment in Stokes Co….. 2,000 2,000 (To defer unrealized gross profit on intra - entitity sale see schedule 2 below) During 2013 Cash Investment in Stokes Co. 4,800 4,800 (to record receipt of divident : $12,000 x 40%) 12/31/2013 Investment in Stokes Co.. Equity in Stokes Income 16,000 12/31/2013 Equity in Stokes Income Investment in Stokes Co. 3,300 16,000 3,300 (To record amortization relating to acquisition of stokes ) 12/31/2013 Investment in Stokes Co. Equity in Stokes Income 2,000 2,000 s 12/31/2013 Equity in Stokes Income Investment in Stokes Co. 3,600 3,600 (To defer unrealized gross profit on intra-entity sale- see schedule 3 below) hould fill in an appropriate answer. Problem 1-30 This template can be used to complete the identified problem. Note that "??" indicates you should fill in an appropriate answ Schedule 1: Acquisition Price Allocation and Amortization Acquisition price Book value acquired Payment in excess of book value $900,000.00 $560,000.00 340,000 Excess payment identified with specific assets: Equipment (150,000 X 35%) Copyright Goodwill Total annual amortization Amount $52,500 $227,500 60,000 Life 7 5 ?? Annual Amortization 7500 45,000 60,000 $ 112,500 Schedule 2: Deferral of Unrealized Intercompany Gain Inventory remaining at year end Gross profit percentage Total markup Investor Ownership Percentage Unrealized intercompany gain ?? 40% #VALUE! 35% ?? Equity Income – 2011 Basic Equity (income) accrual Amortization Equity Income – 2011 $96,250.00 -$26,500.00 69,750 Part a. Equity Income – 2012 Basic Equity (income) accrual Amortization Deferral of unrealized gain Equity Income – 2012 Equity Income – 2013 Basic Equity (income) accrual Amortization Recognition of deferred gain Equity Income – 2013 $ 201,250.00 -$62,800.00 $60,000.00 $198,450.00 $217,000.00 -$53,000.00 $9,800.00 $173,800.00 Part b. Acquisition price 2011 Equity Income 2011 Dividends received 2012 Equity Income 2012 Dividends received 2013 Equity Income 2013 Dividends received Investment in Miller – 12/31/13 ?? ?? (??) ?? (??) ?? (??) 0 should fill in an appropriate answer. ...
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