Problem 1: Balance Sheet Reporting Issues
Crumple Car Rentals is planning to expand into the western part of the United States and needs to acquire approximately 400 additional automobiles for rental purposes. Because Crumple’s cash reserves were substantially depleted in replacing the bumpers on existing automobiles with new “fashion plate” bumpers, the expansion funds must be acquired through other means. Crumple’s management has identified three options:
1. Issue additional debt.
2. Create a wholly owned leasing subsidiary that would borrow the money with a guarantee for payment from Crumple. The subsidiary would then lease the cars to the parent.
3. Create a trust that would borrow the money with a guarantee for repayment from Crumple and lease the cars to it. In the event of liquidation, the residual value of the trust would go to the Historical Preservation Society of Pleasantville.
The acquisition price of the cars is approximately the same under all three alternatives.
Required:
a. You have been asked to compare and contrast the three alternatives from the perspective of:
(1) The impact on Crumple’s consolidated balance sheet.
(2) Their legal ramifications.
(3) The ability to control the maintenance, repair, and replacement of automobiles.
b. You are to consider any alternatives that might be used in acquiring the required automobiles.
c. You are to select the preferred alternatives and show why is the best choice.
Problem 2: Comprehensive Problem: Consolidation of Majority-Owned Subsidiary
On January 2, 2008, B.N. Counter Corporation purchased 75% of Ticken Tie Company’s outstanding common stock. In exchange for Ticken Tie’s stock, B.N Counter issued bonds payable with a par and fair value of $500,000 directly to the selling stockholders of Ticken Tie. The two companies continued to operate as separate entities subsequent to the combination.
Immediately prior to the combination, the book value and fair value of the companies’ assets and liabilities were as follows:
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B. N. Counter
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Ticken Tie
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BV
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FV
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BV
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FV
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Cash
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12,000
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12,000
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9,000
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9,000
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Receivables
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41,000
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39,000
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31,000
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30,000
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Allowance for Bad Debts
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-2,000
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-1,000
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Inventory
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86,000
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89,000
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68,000
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72,000
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Land
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55,000
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200,000
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50,000
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70,000
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Buildings and Equipment
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960,000
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650,000
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670,000
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500,000
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Accumulated Depreciation
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-411,000
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-220,000
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Patent
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_________
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_________
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_________
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40,000
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Total Assets
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741,000
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990,000
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607,000
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721,000
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Current Payables
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38,000
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38,000
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29,000
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29,000
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Bonds Payable
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200,000
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210,000
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100,000
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90,000
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Common Stock
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300,000
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200,000
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Additional Paid-in Capital
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100,000
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130,000
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Retained Earnings
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103,000
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148,000
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Total Liabilities and Equity
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741,000
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607,000
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At the date of combination, Ticken Tie owed B. N. Counter $6,000 plus accrued interest of $500 on a short-term note. Both companies have properly recorded these amounts.
Required:
a. Record the business combination on the books of B.N. Counter Corporation.
b. Present in general journal form all elimination entries needed in a work paper to prepare a consolidated balance sheet immediately following the business combination on January 2, 2008.
c. Prepare and complete a consolidated balance sheet work paper as of January 2, 2008, immediately following the business combination.
d. Present a consolidated balance sheet for the B.N Counter and its subsidiary as of January 2, 2008.
Problem 3: Consolidating an Unprofitable Subsidiary
Amazing Chemical Corporation’s president had always wanted his own yacht and crew and concluded that Amazing Chemical should diversity its investments by purchasing an existing boatyard and repair facility on the lake shore near his summer home. He could then purchase a yacht and have a convenient place to store it and have it repaired. Although the board of directors was never formally asked to approve this new venture, the president moved forward with optimism and a rather substantial amount of money each of the five prior years and had never reported a profit for the original owners.
Not surprisingly, the boatyard continued to lose money after Amazing Chemical purchased it, and the losses grew larger each month. Amazing Chemical, a very profitable chemical company, reported net income of $780,000 on 2002 and $850,000 in 2003 even though the boatyard reported net losses of $160,000 in 2002 and $210,000 in 2003 and was fully consolidated.
Required:
Amazing Chemical’s chief accountant has become concerned that numbers of the board of directors or company shareholders will accuse him of improperly preparing the consolidated statements. The president does not plan to tell anyone about the losses, which do not show up in the consolidated income statement that the chief accountant prepared. You have been asked to prepare a memo to the chief accountant indicating the way to include subsidiaries in the consolidated income statement and to provide citations to or quotations from the authoritative accounting literature that would assist the chief accountant in dealing with this matter. You have also been asked to search the accounting literature to see whether any reporting requirements require disclosure of the boatyard in notes to the financial statements or in management’s discussion and analysis.