Reference no: EM132471576

Case Consolidated Financial Statements: Various Issues

Point 1: 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 noncontrolling stockholder of Algo notified Bevo that a prior stockholder's agreement with Algo empowered him to prevent the sale. The non-controlling 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 noncontrolling 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:

Question a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?

Question b. i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?

Question ii. Should the financial statements of Bevo and Casco be consolidated? Discuss.

Question 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

Question i. An account receivable from Casco

Question ii. An investment in Casco

Question iii. Part of the cost of the property, plant, and equipment

Question iv. A loss