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.

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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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

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