On January 1, 2011, Peterson Corporation exchanged \($1,090,000\) fair-value consideration for all of the outstanding voting stock of Santiago, Inc. At the acquisition date, Santiago had a book value equal to

\($950,000.\) Santiago’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by \($240,000\) with an estimated remaining life of six years. The Santiago acquisition was Peterson’s only business combination for the year. In case expected synergies did not materialize, Peterson Corporation wished to prepare for a potential future spin-off of Santiago, Inc. Therefore, Peterson had Santiago maintain its separate incorporation and independent accounting information system as elements of continuing value.

On December 31, 2011 each company submitted the following financial statements for consolidation.

a. Show how Peterson determined the following account balances • Gain on bargain purchase • Earnings from Santiago • Investment in Santiago

b. Prepare a December 31, 2011, consolidated worksheet for Peterson and Santiago.

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Peterson Corp. Santiago, Inc. Income Statement Revenues... Cost of goods sold Gain on bargain purchase Depreciation and amortization Equity earnings from Santiago (535,000) 170,000 (495,000) 155,000 (100,000) -0- 125,000 140,000 (160,000) Net income (500,000) (200,000) Statement of Retained Earnings Retained earnings, 1/1 (1,500,000) (650,000) Net income (above) (500,000) (200,000) Dividends paid 200,000 50,000 Retained earnings, 12/31 (1,800,000) (800,000) Balance Sheet Current assets 190,000 300,000 Investment in Santiago 1,300,000 -0- Trademarks 100,000 200,000 Patented technology 300,000 400,000 Equipment 610,000 300,000 Total assets 2,500,000 1,200,000 Liabilities (165,000) (100,000) Common stock (535,000) (300,000) Retained earnings, 12/31 (1,800,000) (800,000) Total liabilities and equity (2,500,000) (1,200,000)