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 about a 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


  • Ignore tax impact
  • Net Asset change for the year should be added to the cash account