accounting-As discussed in today’s meeting, Paper Inc.

As discussed in today’s meeting,
Paper Inc. ‘s Board of Directors has requested a set of pro-forma financial statements
for the proposed acquisition of Scissor Company.
For the past several years Paper
Inc’s Executive Management Team hasreceived continued pressure from its
investors for their lack of growth (markets share, revenue, and profits). On
May 1, 2012 the Chief Executive Officer, Chief Operating Officer, and the Chief
Financial Officer all resigned under duress (pressured by Board of Directors to
resign).
For the past twelve months, Paper
Inc.’s Board of Directors and Executive Management Team had been in discussions
with Scissor Company’s Board of Directors abouta possible merger (Paper Inc. acquiring 75% of Scissor Company).
The Paper Inc.Board has determined that this acquisition would be in the best
interest of its shareholders.
The Board has requested that the
Accounting Department provide pro-forma financial statements (income statement,
statement of retained earnings, and balance sheet) for the proposed
consolidated company. In addition, the Board has asked for a detailed
explanation on how the consolidation process works. They specifically requested
a walk-through of the consolidation work paper.
Detailed Request:
1.
Prepare a consolidated balance sheet (January 1,
2012) – assuming the acquisition had taken place on January 1, 2012 (remember
to provide work paper detail).
2.
Prepare a pro-forma income statement, statement of
retained earnings, and balance sheet (assuming the acquisition had taken place
on January 1, 2012) as of December 31, 2012 (remember to show work paper detail
using the 3-section format).
Apply the cost method.
3.
Document all general ledger journal entries (REAL
Entries) that would take place using the assumption above.

Base Data:
As of 1/1/12 the balance sheets
for Paper Inc. (acquirer) and Scissor Company (acquired) immediately prior to
the combination were as follows:

Balance
Sheet as of 12/31/11

Scissor
Company

Paper Inc.

Scissor
Company

Fair Value

Cash

$750,000

$230,000

Same as BV

Current
Assets

207,000

6,000

Same as BV

PPE (net)

813,000

54,000

Same as BV

Land

150,000

25,000

$50,000

Total

1,920,000

315,000

Liabilities

850,000

90,000

Same as BV

Common
Stock, $20 par

825,000

120,000

APIC

109,000

30,000

Retained
Earnings

136,000

75,000

Total

1,920,000

315,000

Key Data and Assumptions:
·
As of 12/31/11 FV of Scissor Company net assets is
equal to BV with the exception of Land, which has a FV of $50,000. On January
1, 2012, Paper Inc. common stock had a fair value of $30 per share. It is
expected that Paper Inc.’s common stock will have a fair value of $30 per share
on 12/31/2012.
·
Assume that Paper Inc. issues 9,600 shares of its
$20 par value common stock for 75% of Skins outstanding stock on January 1,
2012.
·
Assume that the income statements for Paper Inc.
and Scissor are the following in fiscal year 2012. In addition, assume Paper
Inc. had dividends declared of $40,000 and Scissor Company declared $20,000.

Income Statement

Paper
Inc.

Scissor

Revenue

$900,000

$350,000

Dividend
Income

15,000

Total
revenues

915,000

350,000

COGS

550,000

150,000

Operating
Expenses

150,000

100,000

700,000

250,000

Net Income

215,000

100,000

Note:

Ignore tax impact

Net Asset change for the
year should be added to the cash
account

 

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