Question

3. Bigg B. McBigger, Inc. is carrying out expansion plans that require buying up similar companies in new geographical regions. Two acquisitions are on their calendar for the first quarter of next year. BBM will purchase 40% of the outstanding stock of 111 Company for $20 MM cash. This will give BBM significant influence over the company, but not outright control. BBM will also purchase 80% of the outstanding stock of Two2Too, Inc. for $25 MM cash. This will give BBM a majority vote on their board of directors as well as a majority vote among shareholders.

Required:

Describe how the financial statement treatment of these two acquisitions will differ based on the degree of ownership being purchased. Then, assume that each of the acquisitions proceeds as planned AND that each company reports net income of $12 MM for 2020. Describe how this specific result will be reflected in BBM’s balance sheet and income statement. You may assume neither company pays a dividend in 2020.

Answer 1

Financial Treatment:

A) 111 Company

Purchase of outstanding stock of 40% results in treating the company as associate. In preparation of financial statemetns 111 Company 111 Company will be treated as associate.

Net value of investment in associate upto the extent of 40% will be shown as investment in the balance sheet of Bigg B. McBigger, based on the net value of the assets

A) Two2Too Inc.

Purchase of outstanding stock of 80% results in treating the company as subsidary. In preparation of financial statemetns Two2Too INc will be treated as subsidary

In consolidation all the assets and liablities of Two2Too Inc will be merged with the books of Big B. Mcbigger Inc. by eliminating the unrealised gains/losses.