You are on page 1of 7

THIS SHEET IS MEANT ONLY AS A CONVENIENCE.

THE ACTUAL FACTS PRESENTED UNDER THE "COURSE HOME" SHOULD BE REFERENCED AND UTILIZED.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

19

20

2013 PARENT ASSUMPTIONS


Sales will increase by 10% in 2013.
All sales will be on account.
Accounts receivable will be 5% lower on 12/31/13 than on 12/31/12.
Cost of goods sold will increase by 9% in 2013.
All purchases of merchandise will be on account.
Accounts payable are expected to be 50,500 in 12/31/2013.
Inventory will be 3% higher in 2013 than in 2012.
Straight-line depreciation is used for all fixed assets
No fixed assets will be disposed of during 2013. Annual depreciation on existing assets is 40,000 per year.
Equipment was purchased on 1/1/13 for $48,000 cash, with a 10-year life and no salvage.
Operating expenses other than depreciation will increase by 14% in 2013.
All operating expenses other than depreciation will be paid in cash.
Parent's income tax rate is 40%; taxes are paid in four payments on the 15th of April, June, September, and December.
Parent will continue the $2.50 per share annual cash dividend on its common stock.
ACQUISTION
ASSUMPTIIONS
If the tender offer is successful, Parent will finance
the acquisition
by issuing 170,000 of 6% nonconvertible bonds at par on
January 1 , 2013. Bonds pay interest on July 1, 2013 and semiannually thereafter (each January 1 and July 1) until maturity on
January 1, 2023.
The acquisition will be accounted for as a purchase and Parent will account for the investment using the equity method. Direct
costs
for the tender
offer
will be
paid and
in cash
by Parent
in 2013.
As
of January
1, 2013,
all of $2,000
subsidiary's
assets
liabilities
are fairly
valued except for machinery with a book value of $8,000,
estimated fair value of $9,500, and a 5-year remaining useful life. Straight-line depreciation is used to amortize any revaluation
increment.
No transactions between these companies occurred prior to 2013. Parent plans to buy 50,000 of merchandise from Subsidiary in
2013 and will have 3,600 in remaining inventory on Dec 31 2013. Subsidiary is expected to buy 2,400 of merchandise from Parent
in 2013 and to have 495 in inventory on Dec 31, 2013. Parent and Subsidiary price their products to yield a 65% and 80% markup
on cost, respectively.
Parent intends to use three financial yardsticks to determine the financial attractiveness of the combination: (1) Parent wishes to
acquire only if 2013 consolidated earnings per share will be at least as high as the earnings per share Parent would report without
the combination, (2) Parent will consider combination unattractive if it will cause the consolidated current ratio to fall below 2 to 1,
and (3) ROE must remain above 20% for the combined equity.
If financial yardsticks above and the nonfinancial aspects are appealing, then the tender offer will be made. If the objectives are
not met, the acquistion will either be restructured or abandoned.

AssumptionsFinancial Statements
Parent
2012
Actual

Subsidiar
y 2013
Projected

Parent
2013
Projected
$ 880,000
$(526,650)
$(248,860)
$ 102,490
$ (40,996)
$ 61,494

Sales
COGS
Operating expense
Income before taxes
Income tax expense
Net income

$800,000
###
###
$ 96,000
$ (38,400)
$ 57,600

$
$
$
$
$
$

Retained earnings
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
PPE
Accumulated depreciation
Total assets

$ 36,200
$ 39,000
$ 26,000
$673,000
###
$284,200

$
$
$
$
$
$

19,500
13,000
12,000
213,000
(28,000)
229,500

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

Accounts payable
Common stock*
Paid-in capital in excess of par
Retained earnings
Total liabilities and equities

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

$
$
$
$
$

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

$
$
$
$
$

*Parent $12.50 par value


*Subsidiary $75 par value

100,000
(55,000)
(10,000)
35,000
(14,000)
21,000

15200
2000

Depreciation expense for equipment in service 12/31/12


Equipment acquired on 1/1/13
Depreciation expense for equipment acquired on 1/1/13

$ (4,000)
$ 48,000
$ (4,800)

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

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

Parent inc.
Statement of Operations
For the Year ending December 31, 2013
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses
Income before taxes
Income tax expense
Net income

$
$
$
$
$
$
$

Earnings per Share

Shares outstanding

880,000
(528,650)
351,350
(248,860)
102,490
(40,996)
61,494
4.05
15,200

Parent Inc.
Staement of Retained Earnings
For the Year Ending December 31, 2013.
Retained Earnings, 1/1/2013
Net income
Dividends paid
Retained EArnings, 1/31/2013

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

Parent Inc.
Balance Sheet
As at December 31, 2013
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Total current assets

$
$
$

63,594
37,050
26,780
$ 127,394

Longterm assets
Property, Plant and Equipment $ 721,000
Accumulated Depreciation
$ (534,800)
Total Longterm Assets
$ 186,200
Total Assets
$ 313,594
Liabilities & Shareholders' Equity
Laibilities
Accounts Payable
$
50,050
Total liabilities

$ 50,050

Shareholders' Equty
Common
Stockin
@excess
PAR Par
Paid-in Capital
C/S
Retained Earnings
Total Equity
Total Equity & liabilities

$ 263,094
$ 313,594

$ 190,000
$
7,000
$
66,094

Parent Inc.
Statement of Csahflows
For the Year Ended December 31, 2013.
Operating Activities
Net Income
Depreciation expense
Accounts Receivable
Inventory
Accounts Payable
Cash provided by operating activities

$ 61,494
$ 44,800
$
1,950
$
(780)
$
5,900
$ 113,364

Investing Activities
Purchase of Equipment
Cash used in investing activities

$ (48,000)

Financing Activities
Dividends paid
Cash used in financing activities

$ (38,000)

Net change in cash during the year


Cash at the beginning of the year
Cash at the end of the year

$ (48,000)

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

Parent Inc.
Journal
Date
Transactions
15-Apr Income tax expense
Cash
15-Jun Income tax expense
Cash
15-Sep
Income tax expense
Cash
15-Dec
Income tax expense
Cash
15-Dec Dividends
Cash
31-Dec cash
Accounts Receivable

Debits
Credits
$ 10,249
$ 10,249
$ 10,249
$ 10,249
$ 10,249
$ 10,249
$ 10,249
$ 10,249
$ 38,000
$ 38,000
1950
1950