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Table 1

Parent , Inc Actual Financial Statements for 2012 and


Subsidiary Corporation Projected Financial Statements for 2013

Parent 2012
(Actual)
Sales
Cost of Goods Sold
Operating Expenses
Income before Taxes
Income Tax Expense
Net Income

Subsidiary
2013
(Projected)

$800,000
-485,000
-219,000
96,000
-38,400
$57,600

$100,000
-55,000
-10,000
35,000
-14,000
$21,000

Retained Earnings January 1


Add Net Income
Deduct Dividends
Retained Earnings December 31

$23,000
57,600
-38,000
$42,600

$14,500
21,000
-7,000
$28,500

Cash
Accounts Receivable
Inventory
Property, Plant and Equipment
Accumulated Depreciation
Total Assets

$36,200
39,000
26,000
673,000
-490,000
284,200

$19,500
13,000
12,000
213,000
-28,000
229,500

Accounts Payable
Common Stock*
Paid-in Capital in Excess of Par
Retained Earnings
Total Liabilities & Equities

44,600
190,000
7,000
42,600
$284,200

21,000
150,000
30,000
28,500
$229,500

Parent $12.5 par


value,
Subsidiary: $75 par
value

Price per share


Percentage ownership

$105
80%

Parent , Inc Pro Forma Financia

Statement of Operations
Sales
Cost of Goods Sold
Operating Expenses
Income before Taxes
Income Tax Expense
Net Income
Statement of Retained Earnings
Retained Earnings January 1
Add Net Income
Deduct Dividends
Retained Earnings December 31
Balance Sheet
Cash
Accounts Receivable
Inventory
Property, Plant and Equipment
Accumulated Depreciation
Total Assets
Accounts Payable
Common Stock*
Paid-in Capital in Excess of Par
Retained Earnings
Total Liabilities & Equities
*Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow Statement
Net cash flow from operating activities:
Net income
Noncash expenses, revenues, gains and losses included in net income:
Depreciation
Decrease in accounts receivable
Increase in accounts payable
Increase in inventories

Cash flow from operating activities


Cash flows from investing activities:
Acquisition of equipment
Net cash used by investing activities
Cash flows from financing activities:
Dividends paid
Net cash used by financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year

Parent , Inc Pro Forma Financial Statements for 2013

Parent 2012
Actual

2013

$800,000
($485,000)
($219,000)
$96,000
($38,400)
$57,600

$880,000
($528,650)
($248,860)
$102,490
($40,996)
$61,494

$23,000
$57,600
($38,000)
$42,600

$42,600
$61,494
($38,000)
$66,094

Inventory
Accounts Payable

$36,200
$39,000
$26,000
$673,000
($490,000)
$284,200

$63,564
$37,050
$26,780
$721,000
($534,800)
$313,594

Equipment
Cash

$44,600
$190,000
$7,000
$42,600
$284,200

$50,500
$190,000
$7,000
$66,094
$313,594

General Journal
Accounts Receivable
Sales
Cash
Accounts Receivable
Cost of goods sold
Inventory

Accounts Payable
Cash

Depreciation expense
Accumulated depreciation
Operating expense
Cash
Income tax expense
Cash
Dividends
Cash

$61,494

Income Summary
Sales

$44,800
$1,950
$5,900
($780)

Cost of goods sold


Operating expense
Depreciation
Income tax expense

$113,364

($48,000)
($48,000)

Income summary
Income summary
Retained earnings
Retained earnings
Dividends

($38,000)
($38,000)
$27,364
$36,200
$63,564

Debit
$880,000

Credit
$880,000

$881,950
$881,950
$528,650
$528,650
$529,430
$529,430
$523,530
$523,530
$48,000
$48,000
$44,800
$44,800
$248,860
$248,860
$40,996
$40,996
$38,000
$38,000
$880,000
$880,000
$528,650
$248,860
$44,800
$40,996

$863,306
$16,694
$16,694
$38,000
$38,000

Parent , Inc Pro Forma Financial Statements for 2013

Statement of Operations
Sales
Cost of Goods Sold
Operating Expenses
Income before Taxes and interest
Investment income
Interest expense
Income before Taxes
Income Tax Expense
Net Income
Statement of Retained Earnings
Retained Earnings January 1
Add Net Income
Deduct Dividends
Retained Earnings December 31
Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Subsidiary, Inc.
Property, Plant and Equipment
Accumulated Depreciation
Total Assets
Accounts Payable
Interest Payable
Bonds Payable
Common Stock*
Paid-in Capital in Excess of Par
Retained Earnings
Total Liabilities & Equities
*Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow Statement
Net cash flow from operating activities:

Net income
Noncash expenses, revenues, gains and losses included in net income:
Depreciation
Income from Subsidiary
Dividends from Subsidiary, Inc.
Decrease in accounts receivable
Increase in accounts payable
Increase in interest payable
Increase in inventories
Cash flow from operating activities
Cash flows from investing activities:
Purchase of 80% of Subsidiary, Inc. stocks
Acquisition of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of bonds payable
Dividends paid
Net cash used by financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year

Parent 2012
Actual

2013

$800,000
($485,000)
($219,000)
$96,000
$0
$0
$96,000
($38,400)
$57,600

$880,000
($528,650)
($248,860)
$102,490
$16,800
($10,200)
$109,090
($43,636)
$65,454

$23,000
$57,600
($38,000)
$42,600

$42,600
$65,454
($38,000)
$70,054

Accounts Payable
Cash

$36,200
$39,000
$26,000
$0
$673,000
($490,000)
$284,200

$61,424
$37,050
$26,780
$181,200
$721,000
($534,800)
$492,654

Depreciation expense
Accumulated depreciation

$44,600
$0
$0
$190,000
$7,000
$42,600
$284,200

$50,500
$5,100
$170,000
$190,000
$7,000
$70,054
$492,654

General Journal
Accounts Receivable
Sales
Cash
Accounts Receivable
Cost of goods sold
Inventory
Inventory
Accounts Payable

Equipment
Cash

Operating expense
Cash
Income tax expense
Cash
Dividends
Cash
Cash
Bonds Payable
Interest Expense
Cash
Interest payable

$65,454
$44,800
($16,800)
$5,600
$1,950
$5,900
$5,100
($780)
$111,224

($170,000)
($48,000)
($218,000)

170,000
-38,000
132,000
25,224
36,200
61,424

Investment in Subsidiary, Inc.*


Cash
*Purchase cost
Direct costs
Total investment
Cash
Investment in Subsidiary, Inc.*
Receipt of share of the dividend paid
Investment in Subsidiary, Inc.*
Investment Income
Share in Subsidiary income

Debit
$880,000

Credit
$880,000

$881,950
$881,950
$528,650
$528,650
$529,430
$529,430
$523,530
$523,530
$48,000
$48,000
$44,800
$44,800
$204,060
$204,060
$43,636
$43,636
$38,000
$38,000
$170,000
$170,000
$10,200
$5,100
$5,100

$170,000
$170,000
$168,000
$2,000
$170,000
$5,600
$5,600

$16,800
$16,800

Parent , Inc Pro Forma Financial Statements for 2013

Statement of Operations
Sales
Cost of Goods Sold
Operating Expenses
Income before Taxes and interest
Investment income
Interest expense
Income before Taxes
Income Tax Expense
Net Income
Statement of Retained Earnings
Retained Earnings January 1
Add Net Income
Deduct Dividends
Minority Interest
Retained Earnings December 31
Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Subsidiary, Inc.
Property, Plant and Equipment
Accumulated Depreciation
Goodwill
Total Assets
Accounts Payable
Interest Payable
Bonds Payable
Common Stock*
Paid-in Capital in Excess of Par

Retained Earnings

Minority interest
Total Liabilities & Equities
*Parent: $12.50 par value. Subsidiary: $75 par value
Cash Flow Statement
Net cash flow from operating activities:
Net income
Noncash expenses, revenues, gains and losses included in net income:
Depreciation
Income from Subsidiary
Dividends from Subsidiary, Inc.
Decrease in accounts receivable
Increase in accounts payable
Increase in interest payable
Increase in inventories
Cash flow from operating activities
Cash flows from investing activities:
Purchase of 80% of Subsidiary, Inc. stocks
Acquisition of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of bonds payable
Dividends paid
Net cash used by financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year

Intercompany Eliminations
Subsidiary
2013
Parent 2013

N
o
t
e

Debit

N
o
t
e

Credit

Consolidated

$880,000
($528,650)

$100,000
($55,000)

($248,860)
$102,490
$16,800
($10,200)
$109,090
($43,636)
$65,454

($10,000)
$35,000
$0
$0
$35,000
($14,000)
$21,000

$42,600
$65,454
($38,000)

$14,500
$21,000
($7,000)

$70,054

$28,500

$57,100
67,619
-45,000
-8,900
$70,819

$61,424
$37,050
$26,780

$19,500
$13,000
$12,000

$80,924
50,050
36,985

$181,200
$721,000
($534,800)

$0
$213,000
($28,000)

1
2
4

1600
195
240

16,800

3
3

$492,654

$229,500

$50,500
$5,100
$170,000
$190,000
$7,000

$21,000

$150,000
$30,000

3
3

$980,000
-585,445
-259,100
135,455
0
-10,200
125,255
-57,636
$67,619

1
2
3

1600
195
181,200

240

1200
13200

150000
30000

0
935,200
-563,040
13,200
553,319
$71,500
5,100
170,000
190,000
7,000

$70,054

$28,500

3
1
2
3

$492,654

$229,500

14500

70,819
3

11,200

38,900
$233,335

1600
195
240
$227,735

$65,454
$44,800
($16,800)
$5,600
$1,950
$5,900
$5,100
($780)
$111,224

($170,000)
($48,000)
($218,000)

$170,000
($38,000)
$132,000
$25,224
$36,200
$61,424
Note 1
Unsold inventory
Cost of this inventory to Subsidiary
Gross margin
Journal Entry

3600
($2,000)
1600

38,900
$553,319

Cost of sales
Inventory (parent)
Note 2
Unsold inventory in Subsidiary
Cost of this inventory to Parent
Gross margin or unrealized profit
Journal Entry
Cost of sales
Inventory (parent)
Note 3
Common Stock (Subsidiary)
Paid-in Capital in Excess of Par (Subsidiary)
Retained Earnings (Subsidiary)
Goodwill
Machinery (Subsidiary)
Retained Earnings (Parents)
Minority interest
Investment in Subsidiary (Parent)
Note 4
Depreciation of increase in fair value
Depreciation Expense (parent)
Accumulated depreciation (subsidiary)
Note 5
Investment Income (parent)
Retained earnings (parent)

1600
1600

495
($300)
195

195
195

150,000
30,000
14,500
13,200
1200
11200
38,900
181,200

240
240

16,800
16,800

Requirement 1
Statement of Operations
Sales
Cost of Goods Sold
Operating Expenses
Income before Taxes and interest
Investment income
Interest expense
Income before Taxes
Income Tax Expense
Net Income
Statement of Retained Earnings
Retained Earnings January 1
Add Net Income
Deduct Dividends
Minority Interest
Retained Earnings December 31
Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Subsidiary, Inc.
Property, Plant and Equipment
Accumulated Depreciation
Goodwill
Total Assets
Accounts Payable
Interest Payable
Bonds Payable
Common Stock*
Paid-in Capital in Excess of Par
Retained Earnings
Minority interest
Total Liabilities & Equities
*Parent: $12.50 par value. Subsidiary: $75 par value
Earnings per share
Current ratio

$880,000
($528,650)
($248,860)
$102,490
$0
$0
$102,490
($40,996)
$61,494

$42,600
$61,494
($38,000)
$66,094

$63,564
$37,050
$26,780
$721,000
($534,800)
$313,594
$50,500

$190,000
$7,000
$66,094
$313,594

$4.05
2.52

Return on average stockholders equity

24%

Requirement 3
$980,000
($585,445)
($259,100)
$135,455
$0
($10,200)
$125,255
($57,636)
$67,619

$57,100
$67,619
($45,000)
($8,900)
$70,819

$80,924
$50,050
$36,985
$0
$935,200
($563,040)
$13,200
$553,319
$71,500
$5,100
$170,000
$190,000
$7,000
$70,819
$38,900
$553,319

$3.56
2.19

Date
TO: Martha Franklin
FROM:
Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Co
Attachment: Proforma Financial Statements.
Dear Martha,

As can be seen from the attached proforma financial statements, it appears that
would provide a higher return on equity.
Although the Earnings per share and the current ratio would decrease as a resu
purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings p
equity is a long term goal that should be pursued.

purchase of 80% of Subsidiary, Inc as both the current ratio and the earnings p
equity is a long term goal that should be pursued.

40%

% of Subsidiary, Inc.'s Common Stock

statements, it appears that the consolidation of Parent, Inc, and Subssidiary, Inc

would decrease as a result of the consolidation, I still recommend the


t ratio and the earnings per share are short term measures while the return on

t ratio and the earnings per share are short term measures while the return on

Date
TO: Martha Franklin
FROM:
Subject: Analysis of the Proposed Acquisition of 80% of Subsidiary, Inc.'s Common Stock
Attachment: Proforma Financial Statements.
Dear Martha,
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.

ck

idation of

nsolidation,
earnings
d be