ACCOUNTING-As discussed in todayâs meeting, Paper Inc. âs Board of Directors
QUESTION
As discussed in todayâs meeting,
Paper Inc. âs Board of Directors has requested a set of pro-forma financial statements
for the proposed acquisition of Scissor Company.
For the past several years Paper
Incâs Executive Management Team hasreceived continued pressure from its
investors for their lack of growth (markets share, revenue, and profits). On
May 1, 2012 the Chief Executive Officer, Chief Operating Officer, and the Chief
Financial Officer all resigned under duress (pressured by Board of Directors to
resign).
For the past twelve months, Paper
Inc.âs Board of Directors and Executive Management Team had been in discussions
with Scissor Companyâs Board of Directors abouta possible merger (Paper Inc. acquiring 75% of Scissor Company).
The Paper Inc.Board has determined that this acquisition would be in the best
interest of its shareholders.
The Board has requested that the
Accounting Department provide pro-forma financial statements (income statement,
statement of retained earnings, and balance sheet) for the proposed
consolidated company. In addition, the Board has asked for a detailed
explanation on how the consolidation process works. They specifically requested
a walk-through of the consolidation work paper.
Detailed Request:
1.
Prepare a consolidated balance sheet (January 1,
2012) â assuming the acquisition had taken place on January 1, 2012 (remember
to provide work paper detail).
2.
Prepare a pro-forma income statement, statement of
retained earnings, and balance sheet (assuming the acquisition had taken place
on January 1, 2012) as of December 31, 2012 (remember to show work paper detail
using the 3-section format).
Apply the cost method.
3.
Document all general ledger journal entries (REAL
Entries) that would take place using the assumption above.
Base Data:
As of 1/1/12 the balance sheets
for Paper Inc. (acquirer) and Scissor Company (acquired) immediately prior to
the combination were as follows:
Balance
Sheet as of 12/31/11
Scissor
Company
Paper Inc.
Scissor
Company
Fair Value
Cash
$750,000
$230,000
Same as BV
Current
Assets
207,000
6,000
Same as BV
PPE (net)
813,000
54,000
Same as BV
Land
150,000
25,000
$50,000
Total
1,920,000
315,000
Liabilities
850,000
90,000
Same as BV
Common
Stock, $20 par
825,000
120,000
APIC
109,000
30,000
Retained
Earnings
136,000
75,000
Total
1,920,000
315,000
Key Data and Assumptions:
·
As of 12/31/11 FV of Scissor Company net assets is
equal to BV with the exception of Land, which has a FV of $50,000. On January
1, 2012, Paper Inc. common stock had a fair value of $30 per share. It is
expected that Paper Inc.âs common stock will have a fair value of $30 per share
on 12/31/2012.
·
Assume that Paper Inc. issues 9,600 shares of its
$20 par value common stock for 75% of Skins outstanding stock on January 1,
2012.
·
Assume that the income statements for Paper Inc.
and Scissor are the following in fiscal year 2012. In addition, assume Paper
Inc. had dividends declared of $40,000 and Scissor Company declared $20,000.
Income Statement
Paper
Inc.
Scissor
Revenue
$900,000
$350,000
Dividend
Income
15,000
–
Total
revenues
915,000
350,000
COGS
550,000
150,000
Operating
Expenses
150,000
100,000
700,000
250,000
Net Income
215,000
100,000
Note:
–
Ignore tax impact
–
Net Asset change for the
year should be added to the cash
account
ANSWER:
Expert paper writers are just a few clicks away
Place an order in 3 easy steps. Takes less than 5 mins.