KELLER ACCT559 Week 5 Course Project Latest 2022 August

ACCT559 Advanced Accounting

Week 5 Course Project

Overview

Scenario

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, 20X1.

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 20X1 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 20X1 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 20X1 and Parent's actual 20X0 financial statements are presented in Table 1.

Assumptions

Franklin has asked you to use the assumptions below to project Parent's 20X1 financial statements:

Sales will increase by 10% in 20X1.

All sales will be on account.

Accounts receivable will be 5% lower on December 31, 20X1, than on December 31, 20X0.

Cost of goods sold will increase by 9% in 20X1.

All purchases of merchandise will be on account.

Accounts payable is expected to be $50,500 on December 31, 20X1.

Inventory will be 3% higher on December 31, 20X1 than on December 31, 20X0.

Straight-line depreciation is used for all fixed assets.

No fixed assets will be disposed of during 20X1. The annual depreciation on existing assets is $40,000 per year.

Equipment will be purchased on January 1, 20X1, 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 20X1.

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, 20X1. The bonds would first pay interest on July 1, 20X1 and would pay interest semi annually thereafter each January 1 and July 1 until maturity on January 1, 20Y1.(Note: This is a 10-year bond)

This business combination will be recorded using acquisition method 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 20X1.

As of January 1, 20X1, 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 20X1. Regardless of whether they combine, Parent plans to buy $50,000 of merchandise from Subsidiary in 20X1 and will have $3,600 of these purchases remaining in inventory on December 31, 20X1. In addition, Subsidiary is expected to buy $2,400 of merchandise from Parent in 20X1 and to have $495 of these purchases in inventory on December 31, 20X1. 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 20X1 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

Parent Inc. Actual Financial Statements for 2020 and Subsidiary Corporation Projected Financial Statements for 2021

                Parent 20X0 Actual          Subsidiary 20X1 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 20X0 Actual          Subsidiary 20X1 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               

Adjust the separate financial statements of Parent Inc. to reflect the proposed acquisition. Adjust Parent's pro forma 20X1 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, 20X1. To ensure you are starting with the right numbers, use the solution provided to Milestone 1 for the adjusted pro forma 20X1 financial statements of Parent Inc., and the projected 20X1 financial statements of Subsidiary Corporation in Table 1. Show all consolidation adjusting entries, including minority interest entries.

Create a multimedia piece (such as a narrated power point slides with at least a 2-3 minute narration) summarizing your solution in the assignment section of week 5. Do not make it available to the class.