Question

The balance sheets of ABD Inc. and C Corporation on December 31, 2017 are given below:

	ABD Inc.	C Corp.
Assets
Cash	$800	$-0-
Account receivable	-0-	900
Inventory	700	-0-
Current assets	1,500	900
Plant & equipment, net	-0-	1,200
Total	$1,500	$2,100
Liabilities and shareholders’ equity
Account payable	$600	$-0-
Long-term debt	-0-	1,500
Total liabilities	$600	$1,500
Common stock ($1 par)	500	500
Additional paid-in capital	100	-0-
Retained earnings	300	100
Total	$1,500	$2,100

(Required)

1.1 (For this question only) Suppose that ABD purchased 50% of the outstanding common shares of C for $500 cash (paid out of available cash balance; no issuance of common stock). (a) Prepare the B/S of ABD after the purchase (equity method) of investment. Assume that the market value of C’s assets at the time of purchase was $2,500 (with market value of PPE at $1,600); (b) Calculate current ratio and long-term debt-to-equity ratio of ABD before and after the purchase.

1.2 (Continuing from Requirement 1.1) Suppose that you, as a prominent financial analyst, decide to apply the proportionate consolidation on ABD’s balance sheet after the purchase of C. (a) Prepare the B/S of ABD with the proportionate consolidation; (b) Determine and explain the effect of proportionate consolidation on current ratio, long-term debt-to-equity ratio, and (3) indicate (higher, lower, or no change) & explain the effect on ROA ratio (you cannot calculate ROA due to limited information).

Answer 1