Question

Use the following data to answer questions in this part:

Balance sheet data 2009
	Company C	JVC
Cash	$1,050	$300
Accounts receivable	3,000	700
Inventory	2,500	800
Fixed assets	4,500	2,400
Investment in JVC	400
Total assets	$11,450	$4,200
Accounts payable	$2,500	$1,200
Long-term debt	3,000	2,200
Equity	5,950	800
Total liabilities and equity	$11,450	$4,200

Income statement 2009
	Company C	JVC
Sales	$15,430	$2,500
Equity in JV earnings	100
COGS	5,000	1,700
Other expenses	7,600	600
Net income	$2,930	$200

Company C uses LIFO method for inventories. The LIFO reserve was $800 for 2008 (ending inventory for 2008 under LIFO was 1,500) and $900 for 2009.

In 2010, Company C purchases a milling machine, a type of machine used for shaping metal, at a total cost of $9,000. $1,500 was estimated to represent the cost of the rotating cutter, a significant component of the machine. The company expects the machine to have a useful life of eight years and a residual value of $1,000 and that the rotating cutter will need to be replaced after three years. The company uses straight-line depreciation for all assets.

Company C purchased a 7% bond, at par, for $10,000 at the beginning of the year 2010. Interest rates have recently increased and the market value of the bond declined $1,000.

1.Assuming consolidation using the acquisition method, calculate Company C’s stockholders’ equity and total assets. Please explain your calculation.

2.Using the information about bond purchased in 2010, determine the bond’s effect on Company C’s financial statements under each classification of securities. Please explain your answers.

Answer 1

Share of company C in JVC = Share of C in JVC net Income \ Net Income of JVC

= $100\ $200

= 0.5 or 50 %

Consolidation as per the acquisition method

	Consolidated balance sheet of Company C with JVC date 2009
	Particulars		Amount ($)
	Assets
	Cash	(1050+300)	1350
	Account receivable	(3000+700)	3700
	Inventory	(2500+800)	3300
	Fixed Assets		6900
	Tangible	(4500+2400)
	Intangible
	Total Assets		15250
	Equity and Liability
	Equity		5950
	Minority shareholders interest		400
	Long term debts	(3000+2200)	5200
	Account payable	(2500+1200)	3700
	Total Equity and Liabilities		15250
Working notes
1)	Computation of Goodwill/ Capital reserve
	Investment made in JVC		400
	less
	Share capital acquired ((800*50%)		400
	Goodwill or capital reserve		0
2)	Minority shareholders interest
	Equity holdings ((800*50%)		400
	Minority Interest		400

Point 2: As per the Proportionate consolidation

I) LIFO reserve indicates the difference between the value of inventory as per the LIFO method and FIFO method. When there is increase in the interest rate this shows increase in LIFO reserve as less of inventory cost is posted to profit and loss A/c. As Company C is following the LIFO method therefore there is need to reduce such to get the actual COGS.

Company C COGS
Particulars	Amount ($)
COGS of Company C	5000
Share of Company C in COGS of JVC (1700*50%)	850
Incremental LIFO reserve for 2009 (900-800)	-100
Total COGS	5750

II) Net Income of Company C

Particulars		Amount ($)
Sales	(15430 + (2500*50%))	16680
less
COGS	from above	5750
Other expenses	(7600+(600*50%))	7900
Net income		3030