Question

Paris Cosmetics wishes to secure a reliable source of a key component in its eyeshadows and its management is considering two alternative investments. Melonine produces 3 times the supply Paris Cosmetics needs but the only way to guarantee the supply it needs is to purchase the entire ordinary shares of Melonine. They can sell the rest to other manufacturers. JeanPaul produces twice as much of the component that Paris Cosmetics needs and Paris Cosmetics would only have to buy 40% of JeanPaul ordinary shares to insure it could buy 50% of JeanPaul’s output. The table that follows gives the balance sheet information for all 3 companies, prior to the investment by Paris Cosmetics. For the questions below, assume Paris Cosmetics would be able to buy Melonine’s shares at €830,000 and JeanPaul at $240,000. Melonine’s plant assets were appraised at €200,000, with all of its remaining assets and liabilities being appraised at values approximating their book values. Produce consolidated balance sheet for Paris Cosmetics immediately after the acquisition of Melonine and JeanPaul (use the equity method).

                                                Paris Cosmetics           Melonine         JeanPaul

Plant Assets                               400,000                    150,000           50,000

Other Noncash Assets            1,750,000                    980,000           600,000

Investment

Cash                                        2,000,000                    200,000           100,000

Shareholder’s equity               2,950,000                    730,000           600,000

Liabilities                                 1,200,000                    600,000           150,000

Purchase of Melanine

Paris Cosmetics           Paris Cosmetics           Melanine         Consolidating Paris Cosmetics

Before                         After                                                    Entries             Consolidated

Purchase of JeanPaul

Paris Cosmetics           Paris Cosmetics           JeanPaul         

Before                         After                                       

Answer 1