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.

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Chapter1: Financial Statements And Business Decisions
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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 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:

  1. Determine the annual excess fair over book value amortization.

  2. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.

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