Reference no: EM132819115

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 $400 $150 $150

Property, plant, and equipment 600 180 190

Intangible assets 100 70 120

$1,100 $400 $460

Current liabilities $245 $160 $160

Long-term debt 525 250 255

Common shares 60 1

Retained earnings 270 (11)

$1,100 $400

An independent appraiser determined the fair values of Pharma's noncurrent assets. The the appraiser was quite confident with 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:

(a) $45 million

(b) $40 million

(c) $55 million