Ormond Co. acquired all of the outstanding common stock of Daytona Co. on January 1, 2010. Ormond Co. gave shares of its common stock with a fair value of $312 million in exchange for 100 percent of the Daytona Co. common stock. Daytona Co. will remain a legally separate entity after the exchange, but Ormond Co. will prepare consolidated financial statements with Daytona Co each period. Exhibit 7.31 presents the balance sheets of Ormond Co. and Daytona Co. on January 1, 2010, just after the acquisition. The following information applies to Daytona Co.:
1. The market value of Daytona Co.'s fixed assets exceeds their book value by $50 million.
2. Daytona Co. owns a patent with a market value of $40 million.
3. Daytona Co. is a defendant in a lawsuit that it expects to settle during 2010 at a cost of $25 million. The firm carries no insurance against such lawsuits. If permitted, Ormond Co. wants to establish an acquisition reserve for this lawsuit.
4. Daytona Co. has an unrecognized and unfunded retirement health care benefits obligation totaling $20 million on January 1, 2010.
Required
a. Prepare a consolidated balance sheet for Ormond Co. and Daytona Co. on January 1, 2010. Ignore deferred tax effects. (A consolidated worksheet is not required, but it will be illustrated in the solution.)
b. Exhibit 7.32 presents income statements and balance sheets taken from the separate-company books at the end of 2010. The following information applies to these companies:
• The fixed assets of Daytona Co. had an average remaining life of five years on January 1, 2010. The firms use the straight-line depreciation method.
• The patent of Daytona Co. had a remaining life of ten years on January 1, 2010.
• Daytona Co. settled the lawsuit during 2010 and expects no further liability.
• Daytona Co. will amortize and fund its retirement health care benefits obligation over 20 years. It included $1 million in operating expenses during 2010 related to amounts unrecognized and unfunded as of January 1, 2010.
• The test for goodwill impairment indicates that no impairment charge is necessary for 2010.
Prepare a consolidated income statement for 2010 and a consolidated balance sheet on December 31, 2010. (A consolidated worksheet is not required, but it will be illustrated in the solution.)