Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,121,000 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s stockholders’ equity was $2,060,000 including retained earnings of $1,560,000. At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary: Consideration transferred $ 6,121,000 Mathias stockholders' equity 2,060,000 Excess fair over book value $ 4,061,000 to unpatented technology (8-year remaining life) $ 896,000 to patents (10-year remaining life) 2,620,000 to increase long-term debt (undervalued, 5-year remaining life) (160,000 ) 3,356,000 Goodwill $ 705,000 Postacquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends: Income Dividends 2020 $ 457,500 $ 25,000 2021 915,000 50,000 No asset impairments have occurred since the acquisition date. Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period. Allison Mathias Income Statement Sales $ (6,640,000 ) $ (3,960,000 ) Cost of goods sold 4,668,000 2,539,000 Depreciation expense 935,000 313,000 Amortization expense 460,000 121,000 Interest expense 79,000 72,000 Equity earnings in Mathias (573,000 ) 0 Net income $ (1,071,000 ) $ (915,000 ) Statement of Retained Earnings Retained earnings 1/1 $ (5,460,000 ) $ (1,992,500 ) Net income (above) (1,071,000 ) (915,000 ) Dividends declared 560,000 50,000 Retained earnings 12/31 $ (5,971,000 ) $ (2,857,500 ) Balance Sheet Cash $ 93,000 $ 161,000 Accounts receivable 1,010,000 255,000 Inventory 1,820,000 845,000 Investment in Mathias 6,734,500 0 Equipment (net) 3,820,000 2,094,000 Patents 125,000 0 Unpatented technology 2,185,000 1,510,000 Goodwill 467,000 0 Total assets $ 16,254,500 $ 4,865,000 Accounts payable $ (1,083,500 ) $ (307,500 ) Long-term debt (1,000,000 ) (1,200,000 ) Common stock (8,200,000 ) (500,000 ) Retained earnings 12/31 (5,971,000 ) (2,857,500 ) Total liabilities and equity $ (16,254,500 ) $ (4,865,000 ) Required: Determine the annual excess fair over book value amortization. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.
Problem 3-25 (Algo) (LO 3-1, 3-3a, 3-4)
Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,121,000 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s
At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:
Consideration transferred | $ | 6,121,000 | |||||
Mathias stockholders' equity | 2,060,000 | ||||||
Excess fair over book value | $ | 4,061,000 | |||||
to unpatented technology (8-year remaining life) | $ | 896,000 | |||||
to patents (10-year remaining life) | 2,620,000 | ||||||
to increase long-term debt (undervalued, 5-year remaining life) | (160,000 | ) | 3,356,000 | ||||
$ | 705,000 | ||||||
Postacquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends:
Income | Dividends | |||
2020 | $ | 457,500 | $ | 25,000 |
2021 | 915,000 | 50,000 | ||
No asset impairments have occurred since the acquisition date.
Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.
Allison | Mathias | ||||||
Income Statement | |||||||
Sales | $ | (6,640,000 | ) | $ | (3,960,000 | ) | |
Cost of goods sold | 4,668,000 | 2,539,000 | |||||
935,000 | 313,000 | ||||||
Amortization expense | 460,000 | 121,000 | |||||
Interest expense | 79,000 | 72,000 | |||||
Equity earnings in Mathias | (573,000 | ) | 0 | ||||
Net income | $ | (1,071,000 | ) | $ | (915,000 | ) | |
Statement of Retained Earnings | |||||||
Retained earnings 1/1 | $ | (5,460,000 | ) | $ | (1,992,500 | ) | |
Net income (above) | (1,071,000 | ) | (915,000 | ) | |||
Dividends declared | 560,000 | 50,000 | |||||
Retained earnings 12/31 | $ | (5,971,000 | ) | $ | (2,857,500 | ) | |
Cash | $ | 93,000 | $ | 161,000 | |||
1,010,000 | 255,000 | ||||||
Inventory | 1,820,000 | 845,000 | |||||
Investment in Mathias | 6,734,500 | 0 | |||||
Equipment (net) | 3,820,000 | 2,094,000 | |||||
Patents | 125,000 | 0 | |||||
Unpatented technology | 2,185,000 | 1,510,000 | |||||
Goodwill | 467,000 | 0 | |||||
Total assets | $ | 16,254,500 | $ | 4,865,000 | |||
Accounts payable | $ | (1,083,500 | ) | $ | (307,500 | ) | |
Long-term debt | (1,000,000 | ) | (1,200,000 | ) | |||
Common stock | (8,200,000 | ) | (500,000 | ) | |||
Retained earnings 12/31 | (5,971,000 | ) | (2,857,500 | ) | |||
Total liabilities and equity | $ | (16,254,500 | ) | $ | (4,865,000 | ) | |
Required:
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Determine the annual excess fair over book value amortization.
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Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.
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