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. 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. 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 Prepare a statement of operation, a statement of retained earnings, a balance sheet,

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. 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. 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 Prepare a statement of operation, a statement of retained earnings, a balance sheet,

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 12P

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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.

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.

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

Prepare a statement of operation, a statement of retained earnings, a balance sheet, and a cash flow statement.

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