Question

Pharma Company (Pharma) is a pharmaceutical company operating in Winnipeg. It is developing a new drug for treating multiple sclerosis (MS). On January 1, Year 3, Benefit Ltd. (Benefit) signed an agreement to guarantee the debt of Pharma and guarantee a specified rate of return to the common shareholders. In return, Benefit will obtain the residual profits of Pharma. After extensive analysis, it has been determined that Pharma is a controlled special-purpose entity and Benefit is its sponsor.

The balance sheets (in millions) of Benefit and Pharma on January 1, Year 3, were as follows:

	Benefit			Pharma
	Carrying Amount			Carrying Amount			Fair Value
Current assets	$	520		$	80		$	80
Property, plant, and equipment		760			260			270
Intangible assets		140			110			160
	$	1,420		$	450		$	510
Current liabilities	$	325		$	240		$	240
Long-term debt		685			230			235
Common shares		100			1
Retained earnings		310			(21)
	$	1,420		$	450

An independent appraiser determined the fair values of Pharma’s non-current assets. The appraiser was quite confident of the appraised value for the property, plant, and equipment but had some reservations in putting a specific value on the intangible assets.

Required:

Prepare a consolidated balance sheet at January 1, Year 3, assuming that the agreement between Benefit and Pharma established the following fair values for the common shares of Pharma: (Enter your answers in millions of dollars. Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)

(a) $35 million

(b) $30 million

(c) $45 million

Pharma Company
Consolidated Balance Sheet at January 1, Year 3
(in millions)
	(a)		(b)		(c)
Current assets	$		$		$
Property, plant, and equipment
Intangible assets
Goodwill
	$		$		$
Current liabilities	$		$		$
Long-term debt
Common shares
Retained earnings
Non-controlling interest
	$		$		$

Answer 1

Pharma Company Implied Value (i.e., acquisition cost ) of Pharma's Net Assets Fair Value of amount invested by Benefit Fair Value of NCI (= Value of common shares) 35 30 45 Total implied value 35 30 45 Assessed values of Pharma's assets Carrying value of amount invested by Benefit Fair Value of Pharma's own assets 510 510 510 Less:Fair value of Liabilities of Pharma -475 -475 -475 Total assessed value 35 35 Difference between implied and assessed values -5 10 Assigned on consolidation to: Goodwill 10 Gain on purchase -5 Balance to assign The consolidated balance sheet would appear as follows: Current assets 600 600 600 Property , Plant & Equipment 1030 1030 1030 Intangible assets 300 300 300 Goodwill 10 1930 1940 1930 Current Liabilities 565 565 565 Long Term Debt 920 920 920 Common Shares 100 100 100 Retained Earnings 310 315 310 Non Controlling Interest 35 30 45 1930 1930 1940