On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $6,815,000 in cash. Persoff elected to exercise control over Sea Cliff as a wholly owned subsidiary with an independent accounting system. Both companies have December 31 fiscal year-ends. At the acquisition date, Sea Cliff’s stockholders’ equity was $2,527,500 including retained earnings of $1,727,500.   Persoff pursued the acquisition, in part, to utilize Sea Cliff’s technology and computer software. These items had fair values that differed from their values on Sea Cliff’s books as follows:   Asset Book Value Fair Value Remaining Useful Life Patented technology $ 152,500 $ 2,427,500 7 years Computer software $ 67,500 $ 1,867,500 12 years   Sea Cliff’s remaining identifiable assets and liabilities had acquisition-date book values that closely approximated fair values. Since acquisition, no assets have been impaired. During the next three years, Sea Cliff reported the following income and dividends:     Net Income Dividends 2019 $ 900,500 $ 150,000 2020   940,500   150,000 2021   975,500   150,000     December 31, 2021, financial statements for each company follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.     Persoff   Sea Cliff Income Statement               Revenues $ (2,770,000 )   $ (2,275,000 ) Cost of goods sold   1,374,500       879,500   Depreciation expense   287,500       390,000   Amortization expense   385,000       30,000   Equity earnings in Sea Cliff   (500,500 )     0   Net income $ (1,223,500 )   $ (975,500 ) Statement of Retained Earnings               Retained earnings 1/1 $ (7,495,000 )   $ (3,268,500 ) Net income (above)   (1,223,500 )     (975,500 ) Dividends declared   600,000       150,000   Retained earnings 12/31 $ (8,118,500 )   $ (4,094,000 ) Balance Sheet               Current assets $ 512,500     $ 387,500   Investment in Sea Cliff   7,756,500       0   Computer software   325,000       52,500   Patented technology   830,000       90,000   Goodwill   110,000       0   Equipment   1,852,500       4,550,000   Total assets $ 11,386,500     $ 5,080,000   Liabilities $ (1,268,000 )   $ (186,000 )   Common stock   (2,000,000 )     (800,000 ) Retained earnings 12/31   (8,118,500 )     (4,094,000 ) Total liabilities and equity $ (11,386,500 )   $ (5,080,000 )     Note: Parentheses indicate a credit balance.   Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff. Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2021. Determine Persoff's December 31, 2021, Investment in Sea Cliff's balance.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $6,815,000 in cash. Persoff elected to exercise control over Sea Cliff as a wholly owned subsidiary with an independent accounting system. Both companies have December 31 fiscal year-ends. At the acquisition date, Sea Cliff’s stockholders’ equity was $2,527,500 including retained earnings of $1,727,500.

 

Persoff pursued the acquisition, in part, to utilize Sea Cliff’s technology and computer software. These items had fair values that differed from their values on Sea Cliff’s books as follows:

 

Asset Book Value Fair Value Remaining
Useful Life
Patented technology $ 152,500 $ 2,427,500 7 years
Computer software $ 67,500 $ 1,867,500 12 years
 


Sea Cliff’s remaining identifiable assets and liabilities had acquisition-date book values that closely approximated fair values. Since acquisition, no assets have been impaired. During the next three years, Sea Cliff reported the following income and dividends:

 

  Net Income Dividends
2019 $ 900,500 $ 150,000
2020   940,500   150,000
2021   975,500   150,000
 

 

December 31, 2021, financial statements for each company follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.

 

  Persoff   Sea Cliff
Income Statement              
Revenues $ (2,770,000 )   $ (2,275,000 )
Cost of goods sold   1,374,500       879,500  
Depreciation expense   287,500       390,000  
Amortization expense   385,000       30,000  
Equity earnings in Sea Cliff   (500,500 )     0  
Net income $ (1,223,500 )   $ (975,500 )
Statement of Retained Earnings              
Retained earnings 1/1 $ (7,495,000 )   $ (3,268,500 )
Net income (above)   (1,223,500 )     (975,500 )
Dividends declared   600,000       150,000  
Retained earnings 12/31 $ (8,118,500 )   $ (4,094,000 )
Balance Sheet              
Current assets $ 512,500     $ 387,500  
Investment in Sea Cliff   7,756,500       0  
Computer software   325,000       52,500  
Patented technology   830,000       90,000  
Goodwill   110,000       0  
Equipment   1,852,500       4,550,000  
Total assets $ 11,386,500     $ 5,080,000  
Liabilities $ (1,268,000 )   $ (186,000 )  
Common stock   (2,000,000 )     (800,000 )
Retained earnings 12/31   (8,118,500 )     (4,094,000 )
Total liabilities and equity $ (11,386,500 )   $ (5,080,000 )
 

 

Note: Parentheses indicate a credit balance.
 

  1. Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.

  2. Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2021.

  3. Determine Persoff's December 31, 2021, Investment in Sea Cliff's balance.

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

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