Download: http://solutionzip.com/downloads/parent-inc-solution/ Parent Inc. is contemplating a tender offer to acquire 80% of Subsidiary Corpora tion's common stock.

Subsidiary's shares are currently quoted on the New York Stock Exchange at $85 per share. In order to have a reasonable chance of the tender of fer attracting 80% of Subsidiary's stock, Parent believes it will have to offer at least $105 per share. If the tender offer is made and is successful, the purcha se will be consummated on January 1, 2013. A typical part of the planning of a proposed business combination is the prepara tion of projected or pro forma consolidated financial statements. As a member of Parent's accounting group, you have been asked to prepare the pro forma 2013 cons olidated financial statements for Parent and Subsidiary assuming that 80% of Sub sidiary's stock is acquired at a price of $105 per share. To support your computat ions, Martha Franklin, the chairperson of Parent's acquisitions committee, has pro vided you with the projected 2013 financial statements for Subsidiary. (The proj ected financial statements for Subsidiary and several other companies were prepa red earlier for the acquisition committee's use in targeting a company for acquisi tion.) The projected financial statements for Subsidiary for 2013 and Parent's act ual 2012 financial statements are presented in Table 1. Assumptions 1.Sales will increase by 10% in 2013. 2.All sales will be on account. 3.Accounts receivable will be 5% lower on December 31, 2013, than on December 31 , 2012. 4.Cost of goods sold will increase by 9% in 2013. 5.All purchases of merchandise will be on account. 6.Accounts payable are expected to be $50,500 on December 31, 2013. 7.Inventory will be 3% higher on December 31, 2013, than on December 31, 2012. 8.Straight-line depreciation is used for all fixed assets. 9.No fixed assets will be disposed of during 2013. The annual depreciation on ex isting assets is $40,000 per year. 10.Equipment will be purchased on January 1, 2013, for $48,000 cash. The equipme nt will have an estimated life of 10 years, with no salvage value. 11.Operating expenses, other than depreciation, will increase by 14% in 2013. 12.All operating expenses, other than depreciation, will be paid in cash. 13.Parent's income tax rate is 40%, and taxes are paid in cash in four equal payme nts. Payments will be made on the 15th of April, June, September, and December. For simplicity, assume taxable income equals financial reporting income before t axes. 14.Parent will continue the $2.50 per share annual cash dividend on its common s tock. 15.If the tender offer is successful, Parent will finance the acquisition by iss uing $170,000 of 6% nonconvertible bonds at par on January 1, 2013. The bonds wo uld first pay interest on July 1, 2013, and would pay interest semiannually ther eafter each January 1 and July 1 until maturity on January 1, 2023. 16.The acquisition will be accounted for as a purchase and Parent will account f or the investment using the equity method. Although most of the legal work relat ed to the acquisition will be handled by Parent's staff attorney, direct costs to prepare and process the tender offer will total $2,000 and will be paid in cash by Parent in 2013. As of January 1, 2013, all of Subsidiary's assets and liabilities are fairly value d except for machinery with a book value of $8,000, an estimated fair value of $ 9,500, and a 5-year remaining useful life. Assume that straight-line depreciatio n is used to amortize any revaluation increment. No transactions between these companies occurred prior to 2013. Regardless of wh ether they combine, Parent plans to buy $50,000 of merchandise from Subsidiary i n 2013 and will have $3,600 of these purchases remaining in inventory on Decembe r 31, 2013. In addition, Subsidiary is expected to buy $2,400 of merchandise fro m Parent in 2013 and to have $495 of these purchases in inventory on December 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 attr activeness of the combination. First, Parent wishes to acquire Subsidiary Corpor ation only if 2013 consolidated earnings per share will be at least as high as t he earnings per share Parent would report if no combination takes place. Second, Parent will consider the proposed combination unattractive if it will cause the consolidated current ratio to fall below two to one. Third, return on average s tockholders' equity must remain above 20% for the combined entity. If the financial yardsticks described above and the nonfinancial aspects of the combination are appealing, then the tender offer will be made. On the other hand , if these objectives are not met, the acquisition will either be restructured o r abandoned. Subsidiary Corporation Projected Financial Statements for 2013 Parent 2012 Actual Subsidiary 2013 Projected Sales $800,000 $100,000 Cost of goods sold (485,000) (55,000) Operating expenses (219,000) (10,000) Income before taxes 96,000 35,000 Income tax expense (38,400) (14,000) Net income 57,600 21,000 Retained earnings, January 1 23,000 14,500 Add; net income 57,600 21,000 Less: dividends (38,000) (7,000) Retained earnings, December 31 42,600 28,500 Cash 36,200 19,500 Accounts receivable 39,000 13,000 Inventory 26,000 12,000 Property, plant, and equipment 673,000 213,000 Accumulated depreciation (490,000) (28,000) Total assets 284,200 229,500 Parent 2012 Actual Subsidiary 2013 Projected Accounts payable 44,600 21,000 Common stock * 190,000 150,000 Paid-in capital in excess of par 7,000 30,000 Retained earnings 42,600 28,500 Total liabilities and stockholders' equity 284,200 229,500 * Parent: $12.50 par; Subsidiary: $75 par 1.Forecast the separate financial statements of Parent Inc. Using Ms. Franklin's a ssumptions and Parent's 2012 financial statements, prepare pro forma 2013 financia l statements for Parent Inc., assuming that the acquisition is not attempted. Su pport your statements with appropriate work papers and journal entries. Pro form a financial statements include a statement of operation, a statement of retained earnings, a balance sheet, and a cash flow statement.NOTE: There is a Template for Milestones 1 and 2 available for your download that is also located in Doc S haring. 2.Adjust the separate financial statements of Parent Inc. to reflect the propose d acquisition. Adjust Parent's pro forma 2013 financial statements prepared in Mil estone 1 to reflect the proposed acquisition (i.e., adjust Parent's forecasted fin ancial statements for bond issuance, stock purchase, income from subsidiary, etc .). Support your statements with appropriate work papers and journal entries. Pr o forma financial statements include a statement of operation, a statement of re tained earnings, a balance sheet, and a cash flow statement. 3.Prepare a pro forma consolidated worksheet. Prepare a pro forma consolidation worksheet for Parent Inc. and its proposed subsidiary as of December 31, 2013. T o ensure you are starting with the right numbers, use the solution provided to M ilestone 1 for the adjusted pro forma 2013 financial statements of Parent Inc., and the projected 2013 financial statements of Subsidiary Corporation in Table 1 . Show all consolidation adjusting entries, including minority interest entries. Download: http://solutionzip.com/downloads/parent-inc-solution/