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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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ANY BLANCE SHEET GENIUSES OUT THERE? What would be the

Customer Question

ANY BLANCE SHEET GENIUSES OUT THERE? What would be the starting Balance Sheet in the following scenario:
Holding Company and new investor are creating a NewCo split 75% / 25% where the new investor is paying $1 million, half of that will stay in the NewCo for 12.5% and half will partially buy out the holding co so the new investor owns 25%. There is $14K in fixed assets and $480K in notes that would transfer to the NewCo. Would the balance sheet look like this or something else?
ASSETS
Cash $500,000
A/R $0
Fixed Assets $14,014
Total Assets $514,014
LIABILITIES
A/P $0
Notes $480,000
Total Liabilities $480,000
Equity:
- New Investor 1,000,000
- Original Investor 3,000,000
- Opening Balance Equity $-3,965,986
Total Equity $34,014
Total Liabilities and Equity $514,014
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Note that line breaks in the balance sheet above may have been dropped by JustAnswer.
Expert:  USTaxAdvising replied 1 year ago.

Hello,

I can help you with your balance sheet question. I have attached my workings of the balance sheet given your facts provided.

Please have a look over and let me know if you have any questions. There should be no opening balance equity unless the Holdco is being merged into the NewCo.

Best regards,

Customer: replied 1 year ago.
Notes payable to banks are not assets. This also indicates the new investor iwns 2/3rds and we own 1/3rd which would not be correct. Or us ownership not recorded on the balance sheet?
Expert:  USTaxAdvising replied 1 year ago.

Hello,

My apologies, I read that the notes were assets of HoldCo and were being contributed to NewCo in exchange for an interest in NewCo. Since HoldCo is contributing liabilities it would have a deficit in it's capital.

How does the original investor contribute $3M?

Please confirm the facts for me:

1. NewCo is formed by "New Investor" contributing cash of $1M and Holdco Contributing assets of 14K and liabilities of 480K.

2. NewCo uses 500K of "New Investor" cash to purchase an interest in Holdco for 500K.

3. 500K in cash will remain in NewCo.

If you can confirm this for me as well as clarify how the Original Investor has a $3M interest in NewCo I can update the balance sheet.

Best regards,

Customer: replied 1 year ago.
OldCo would be contributing $3.5M in IP Assets and NewCo would assume the $500k note previously owed by Oldco
Customer: replied 1 year ago.
Your item 2 is not what I stated. The amount HoldingCo is contributing can be variable so long as the 75%/25% ratio is achieved. Maybe below is one answer, see anything wrong with it?
ASSETS
Cash $500,000
A/R $0
Fixed Assets $14,014
Intangible Mktg License Assets $1,965,986
Total Assets $2,480,000
LIABILITIES
A/P $0
Bank Loans $480,000
Total Liabilities $480,000
Equity:
- New Investor 500,000
- HoldingCo 1,500,000
Total Liabilities and Equity $2,480,000
Expert:  USTaxAdvising replied 1 year ago.

Hello,

I have updated the balance sheet workings given the facts above. The 75/25 ratio is maintained. Note that the new investor must have equity to start of at least 1M as he contributed 1M to start the newco.

Let me know if something is still not quite correct as you see it. \

Best regards,

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