Financial Statements Analysis

Problem 1

The balance sheets of ABD Inc. and C Corporation on December 31,
2016 are given below:

(Required)

Immediately following the preparation of B/S above, ABD issued
500 shares of its common stock at $1.10 per share, and used the
$550 proceed to purchase 100% of the common stock of C. (a)
Determine the amount of goodwill ABD should recognize for this
transaction. (b) Prepare the consolidated B/S that ABD would report
immediately following the investment in C. Assume that the market
value of C’s asset at the time of acquisition is $1,500 (with
market value of PPE at $900; for all others are the same as
stated). (c) Calculate current ratio and long-term debt-to-equity
ratio of ABD before and after the acquisition.

(For this question only) Suppose that ABD purchases (paid with
existing cash; no issuance of stock) 50% of the outstanding common
shares of C for $225. (a) Prepare the B/S of ABD after the purchase
(equity method) of investment. Assume that the market value of C’s
asset at the time of purchase is $1,500 (with market value of PPE
at $900). (b) Calculate current ratio and long-term debt-to-equity
ratio of ABD before and after the purchase.

(Continuing from Requirement 2) 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 indicate (higher, lower, or no
change) and explain the effect on ROA ratio (you cannot calculate
ROA due to limited information).