Case 16-1 Consolidated Financial Statements: Various Issues
Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of the agreement, but just before closing and actual transfer of the property, a minority stockholder of Algo notified Bevo that a prior stockholder’s agreement with Algo empowered him to prevent the sale. The minority stockholder’s claim was acknowledged by Bevo’s board of directors. Bevo’s board then organized Casco, Inc. to acquire the minority stockholder’s interest in Algo for $75,000, and Bevo advanced the cash to Casco. Bevo exercised control over Casco as a subsidiary corporation with common officers and directors. Casco paid the minority stockholder $75,000 (about twice the market value of the Algo stock) for his interest in Algo. Bevo then purchased the manufacturing division from Algo.
Required:
a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?
b. i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?
ii. Should the financial statements of Bevo and Casco be consolidated? Discuss.
c. Assume that unconsolidated financial statements are prepared. Discuss the propriety of treating the $75,000 expenditure in the financial statements of the Bevo as
i. an account receivable from Casco
ii. an investment in Casco
iii. part of the cost of the property, plant, and equipment
iv. a loss
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