Table 1 Parent , Inc Actual Financial Statements for 2012 and Subsidiary Corporation Projected Financial Statements for 2013 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 Deduct 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 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 & Equities $284,200 $229,500 Parent 2012 (Actual) 2013 (Projected ) Parent $12.5 par value, Subsidiary: $75 par value
Transcript
Table 1Parent , Inc Actual Financial Statements for 2012 and
Subsidiary Corporation Projected Financial Statements for 2013
Sales $800,000 $100,000 Cost of Goods Sold -485,000 -55,000Operating Expenses -219,000 -10,000Income before Taxes 96,000 35,000Income 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 21,000Deduct Dividends -38,000 -7,000 Retained Earnings December 31 $42,600 $28,500
Accounts Payable 44,600 21,000Common Stock* 190,000 150,000Paid-in Capital in Excess of Par 7,000 30,000Retained Earnings 42,600 28,500 Total Liabilities & Equities $284,200 $229,500
Parent 2012
(Actual)
Subsidiary 2013
(Projected)
Parent $12.5 par value,Subsidiary: $75 par value
A29
Parent $12.5 par value, Subsidiary: $75 par value
Price per share $105 Percentage ownership 80%
Parent , Inc Pro Forma Financial Statements for 2013
2013Statement of OperationsSales $800,000 $880,000 Cost of Goods Sold ($485,000) ($528,650)Operating Expenses ($219,000) ($248,860)Income before Taxes $96,000 $102,490 Income Tax Expense ($38,400) ($40,996) Net Income $57,600 $61,494
Statement of Retained EarningsRetained Earnings January 1 $23,000 $42,600 Add Net Income $57,600 $61,494 Deduct Dividends ($38,000) ($38,000) Retained Earnings December 31 $42,600 $66,094
Accounts Payable $44,600 $50,500 Common Stock* $190,000 $190,000 Paid-in Capital in Excess of Par $7,000 $7,000 Retained Earnings $42,600 $66,094 Total Liabilities & Equities $284,200 $313,594 *Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow StatementNet cash flow from operating activities:Net income $61,494 Noncash expenses, revenues, gains and losses included in net income:Depreciation $44,800 Decrease in accounts receivable $1,950 Increase in accounts payable $5,900 Increase in inventories ($780)
Cash flow from operating activities $113,364
Cash flows from investing activities:Acquisition of equipment ($48,000)
Net cash used by investing activities ($48,000)
Parent 2012 Actual
Cash flows from financing activities:Dividends paid ($38,000)
Net cash used by financing activities ($38,000)
Net increase in cash $27,364 Cash at beginning of year $36,200 Cash at end of year $63,564
Parent , Inc Pro Forma Financial Statements for 2013
General Journal Debit CreditAccounts Receivable $880,000 Sales $880,000
Cost of goods sold $528,650 Operating expense $248,860 Depreciation $44,800 Income tax expense $40,996 Income summary $863,306
Income summary $16,694 Retained earnings $16,694
Retained earnings $38,000
Dividends $38,000
Parent , Inc Pro Forma Financial Statements for 2013
2013Statement of OperationsSales $800,000 $880,000 Cost of Goods Sold ($485,000) ($528,650)Operating Expenses ($219,000) ($248,860)Income before Taxes and interest $96,000 $102,490 Investment income $0 $16,800 Interest expense $0 ($10,200)Income before Taxes $96,000 $109,090 Income Tax Expense ($38,400) ($43,636) Net Income $57,600 $65,454
Statement of Retained EarningsRetained Earnings January 1 $23,000 $42,600 Add Net Income $57,600 $65,454 Deduct Dividends ($38,000) ($38,000) Retained Earnings December 31 $42,600 $70,054
Balance SheetCash $36,200 $61,424 Accounts Receivable $39,000 $37,050 Inventory $26,000 $26,780 Investment in Subsidiary, Inc. $0 $181,200 Property, Plant and Equipment $673,000 $721,000 Accumulated Depreciation ($490,000) ($534,800) Total Assets $284,200 $492,654
Accounts Payable $44,600 $50,500 Interest Payable $0 $5,100 Bonds Payable $0 $170,000 Common Stock* $190,000 $190,000 Paid-in Capital in Excess of Par $7,000 $7,000 Retained Earnings $42,600 $70,054 Total Liabilities & Equities $284,200 $492,654 *Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow StatementNet cash flow from operating activities:Net income $65,454 Noncash expenses, revenues, gains and losses included in net income:Depreciation $44,800 Income from Subsidiary ($16,800)Dividends from Subsidiary, Inc. $5,600 Decrease in accounts receivable $1,950
Parent 2012 Actual
Increase in accounts payable $5,900 Increase in interest payable $5,100 Increase in inventories ($780)
Cash flow from operating activities $111,224
Cash flows from investing activities:Purchase of 80% of Subsidiary, Inc. stocks ($170,000)Acquisition of equipment ($48,000)
Net cash used by investing activities ($218,000)
Cash flows from financing activities:Issuance of bonds payable 170,000Dividends paid -38,000
Net cash used by financing activities 132,000
Net increase in cash 25,224Cash at beginning of year 36,200Cash at end of year 61,424
General Journal Debit CreditAccounts Receivable $880,000 Sales $880,000
Investment in Subsidiary, Inc.* $170,000 Cash $170,000 *Purchase cost $168,000 Direct costs $2,000 Total investment $170,000
Cash $5,600 Investment in Subsidiary, Inc.* $5,600 Receipt of share of the dividend paid
Investment in Subsidiary, Inc.* $16,800 Investment Income $16,800 Share in Subsidiary income
Parent , Inc Pro Forma Financial Statements for 2013
Parent 2013Statement of OperationsSales $880,000 $100,000 Cost of Goods Sold ($528,650) ($55,000)
Operating Expenses ($248,860) ($10,000)Income before Taxes and interest $102,490 $35,000 Investment income $16,800 $0 Interest expense ($10,200) $0 Income before Taxes $109,090 $35,000 Income Tax Expense ($43,636) ($14,000) Net Income $65,454 $21,000
Statement of Retained EarningsRetained Earnings January 1 $42,600 $14,500 Add Net Income $65,454 $21,000 Deduct Dividends ($38,000) ($7,000)Minority Interest Retained Earnings December 31 $70,054 $28,500
Investment in Subsidiary, Inc. $181,200 $0 Property, Plant and Equipment $721,000 $213,000 Accumulated Depreciation ($534,800) ($28,000)Goodwill Total Assets $492,654 $229,500
Accounts Payable $50,500 $21,000 Interest Payable $5,100 Bonds Payable $170,000 Common Stock* $190,000 $150,000 Paid-in Capital in Excess of Par $7,000 $30,000 Retained Earnings $70,054 $28,500
Minority interest
Subsidiary 2013
Total Liabilities & Equities $492,654 $229,500 *Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow StatementNet cash flow from operating activities:Net income $65,454 Noncash expenses, revenues, gains and losses included in net income:Depreciation $44,800 Income from Subsidiary ($16,800)Dividends from Subsidiary, Inc. $5,600 Decrease in accounts receivable $1,950 Increase in accounts payable $5,900 Increase in interest payable $5,100 Increase in inventories ($780)
Cash flow from operating activities $111,224
Cash flows from investing activities:Purchase of 80% of Subsidiary, Inc. stocks ($170,000)Acquisition of equipment ($48,000)
Net cash used by investing activities ($218,000)
Cash flows from financing activities:Issuance of bonds payable $170,000 Dividends paid ($38,000)
Net cash used by financing activities $132,000
Net increase in cash $25,224 Cash at beginning of year $36,200 Cash at end of year $61,424
Note 1Unsold inventCost of this inventory to SubsidiaryGross margin
Journal EntryCost of salesInventory (parent)
Note 2Unsold inventory in SubsidiaryCost of this inventory to ParentGross margin or unrealized profit
Journal EntryCost of salesInventory (parent)
Note 3Common Stock (Subsidiary)Paid-in Capital in Excess of Par (Subsidiary)Retained Earnings (Subsidiary)GoodwillMachinery (Subsidiary)Retained Earnings (Parents)Minority interestInvestment in Subsidiary (Parent)
Note 4Depreciation of increase in fair valueDepreciation Expense (parent)Accumulated depreciation (subsidiary)
Note 5Investment Income (parent)Retained earnings (parent)
Unsold inventory in Subsidiary 495Cost of this inventory to Parent ($300)Gross margin or unrealized profit 195
195195
Common Stock (Subsidiary) 150,000Paid-in Capital in Excess of Par (Subsidiary) 30,000Retained Earnings (Subsidiary) 14,500
13,2001200
Retained Earnings (Parents) 1120038,900
Investment in Subsidiary (Parent) 181,200
Depreciation of increase in fair valueDepreciation Expense (parent) 240Accumulated depreciation (subsidiary) 240
Investment Income (parent) 16,80016,800
Statement of OperationsSales $880,000 $980,000 Cost of Goods Sold ($528,650) ($585,445)Operating Expenses ($248,860) ($259,100)Income before Taxes and interest $102,490 $135,455 Investment income $0 $0 Interest expense $0 ($10,200)Income before Taxes $102,490 $125,255 Income Tax Expense ($40,996) ($57,636) Net Income $61,494 $67,619
Statement of Retained EarningsRetained Earnings January 1 $42,600 $57,100 Add Net Income $61,494 $67,619 Deduct Dividends ($38,000) ($45,000)Minority Interest ($8,900) Retained Earnings December 31 $66,094 $70,819
Balance SheetCash $63,564 $80,924 Accounts Receivable $37,050 $50,050 Inventory $26,780 $36,985 Investment in Subsidiary, Inc. $0 Property, Plant and Equipment $721,000 $935,200 Accumulated Depreciation ($534,800) ($563,040)Goodwill $13,200 Total Assets $313,594 $553,319
Accounts Payable $50,500 $71,500 Interest Payable $5,100 Bonds Payable $170,000 Common Stock* $190,000 $190,000 Paid-in Capital in Excess of Par $7,000 $7,000 Retained Earnings $66,094 $70,819 Minority interest $38,900 Total Liabilities & Equities $313,594 $553,319 *Parent: $12.50 par value. Subsidiary: $75 par value
Earnings per share $4.05 $3.56 Current ratio 2.52 2.19Return on average stockholders equity 24% 40%
Requirement 1
Requirement 3
DateTO: Martha FranklinFROM:Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
As can be seen from the attached proforma financial statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc would provide a higher return on equity.Although the Earnings per share and the current ratio would decrease as a result of the consolidation, I still recommend the purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings per share are short term measures while the return on equity is a long term goal that should be pursued.
DateTO: Martha FranklinFROM:Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
As can be seen from the attached proforma financial statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc would provide a higher return on equity.Although the Earnings per share and the current ratio would decrease as a result of the consolidation, I still recommend the purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings per share are short term measures while the return on equity is a long term goal that should be pursued.
DateTO: Martha FranklinFROM:Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
As can be seen from the attached proforma financial statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc would provide a higher return on equity.Although the Earnings per share and the current ratio would decrease as a result of the consolidation, I still recommend the purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings per share are short term measures while the return on equity is a long term goal that should be pursued.
DateTO: Martha FranklinFROM:Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
As can be seen from the attached proforma financial statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc would provide a higher return on equity.Although the Earnings per share and the current ratio would decrease as a result of the consolidation, I still recommend the purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings per share are short term measures while the return on equity is a long term goal that should be pursued.
DateTO: Martha FranklinFROM:Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
As can be seen from the attached proforma financial statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc would provide a higher return on equity.Although the Earnings per share and the current ratio would decrease as a result of the consolidation, I still recommend the purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings per share are short term measures while the return on equity is a long term goal that should be pursued.
