View the step-by-step solution to:

I need help to complete requirements #3 & #4. How do I prepare a consolidated worksheet using the parent company concept?

I need help to complete requirements #3 & #4. How do I prepare a consolidated worksheet using the parent company concept?  
Here are some check figures.  
Sales - $927,600
Net Income - $64,425
Retained earnings 12/31/04 - $69,025
Assets - $554,005
Non-controlling Interest (income statement) - $3,880
Non-controlling Interest (balance sheet) - $41,380
Please see attached documents.

Problem Description
Main, Inc. is contemplating a tender offer to acquire 80 percent 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 percent of
Subsidiary's stock, Main 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, 2004.
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 Main's accounting group, you have been asked to prepare
the pro forma 2004 consolidated financial statements for Main and
Subsidiary assuming that 80 percent of Subsidiary's stock is acquired at
a price of $105 per share. To support your computations, Dave Johnson,
the chairperson of Main's acquisitions committee, has provided you with
the projected 2004 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 2004 and Main's actual 2003 financial statements are
presented in table 1.
Assumptions
Mr. Johnson has asked you to use the following assumptions to project
Main's 2004 financial statements:
Sales will increase by 10 percent in 2004.
All sales will be on account.
Accounts receivable will be 5 percent lower on December 31, 2004, than
on December 31, 2003.
Cost of goods sold will increase by 9 percent in 2004.
All purchases of merchandise will be on account.
Accounts payable are expected to be $50,500 on December 31, 2004.
Inventory will be 3 percent higher on December 31, 2004, than on
December 31, 2003.
Straight-line depreciation is used for all fixed assets.
No fixed assets will be disposed of during 2004. The annual depreciation
on existing assets is $40,000 per year.
Equipment will be purchased on January 1, 2004, 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 percent
in 2004.
All operating expenses, other than depreciation, will be paid in cash.
Main's income tax rate is 40 percent, 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.
Main will continue the $2.50 per share annual cash dividend on its
common stock.
Main will finance the acquisition by issuing $170,000 of 6 percent
non-convertible bonds at par on January 1, 2004. The bonds would first
pay interest on July 1, 2004, and would pay interest semi-annually
thereafter each January 1 and July 1 until maturity on January 1, 2014.
The acquisition will be accounted for as a purchase and Main will
account for the investment using the equity method. Although most of the
legal work related to the acquisition will be handled by Main's staff
attorney, direct costs to prepare and process the tender offer will
total $2,000 and will be paid in cash by Main in 2004.
As of January 1, 2004, 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 2004.
Regardless of whether they combine, Main plans to buy $50,000 of
merchandise from Subsidiary in 2004 and will have $3,600 of these
purchases remaining in inventory on December 31, 2004. In addition,
Subsidiary is expected to buy $2,400 of merchandise from Main in 2004
and to have $495 of these purchases in inventory on December 31, 2004.
Main and Subsidiary price their products to yield a 65 percent and 80
percent markup on cost, respectively.
Main intends to use three financial yardsticks to determine the
financial attractiveness of the combination. First, Main wishes to
acquire Subsidiary Corporation only if 2004 consolidated earnings per
share will be at least as high as the earnings per share Main would
report if no combination takes place. Second, Main will consider the
proposed combination unattractive if it will cause the consolidated
current ratio to fall below 2 to 1. Third, return on average
stockholders' equity must remain above 20 percent for the combined
entity.
If the financial yardsticks described above and the non-financial
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.
Required
1. Forecast the separate financial statements of Main, Inc. Using Ms.
Franklin's assumptions and Main's 2003 financial statements, prepare pro
forma 2004 financial statements for Main, Inc., assuming that the
acquisition is not attempted. Support your statements with appropriate
work papers and journal entries. Pro forma financial statements include
Statement of Operation; Statement of Retained Earnings, Balance Sheet
and Cash Flow Statement.
2. Adjust the separate financial statements of Main, Inc. to reflect the
proposed acquisition. Adjust Main's pro forma 2004 financial statements
prepared in #1 to reflect the proposed acquisition (i.e., adjust Main'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
Statement of Operation; Statement of Retained Earnings, Balance Sheet
and Cash Flow Statement.
3. Prepare pro forma consolidated worksheet. Prepare a pro forma
consolidation worksheet for Main, Inc. and its proposed subsidiary as of
December 31, 2004. Use the adjusted pro forma 2004 financial statements
of Main, Inc. prepared in #2 and the projected 2004 financial statements
of Subsidiary Corporation in table 1. Show all consolidation adjusting
entries including minority interest entries.
4. Perform ratio analysis. Compute earnings per share for (1) the
separate financial statements of Main, Inc. prepared in #1 and (2) the
consolidated financial statements contained in the pro forma
consolidation worksheet prepared in #3. Also, calculate current ratio
and return on average stockholders' equity for the consolidated
financial statements.
Table 1
Main , Inc Actual Financial Statements for 2003 and
Subsidiary Corporation Projected Financial Statements for 2004
Main 2003 Actual Subsidiary 2004 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
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
*Main: $12.50 par value. Subsidiary: $75 par value

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question