Question
Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,387,500 in cash. Allison intends to
Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,387,500 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathiass stockholders equity was $2,125,000 including retained earnings of $1,625,000.
At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:
Consideration transferred | $ | 6,387,500 | |||||
Mathias stockholders' equity | 2,125,000 | ||||||
Excess fair over book value | $ | 4,262,500 | |||||
to unpatented technology (8-year remaining life) | $ | 1,000,000 | |||||
to patents (10-year remaining life) | 2,750,000 | ||||||
to increase long-term debt (undervalued, 5-year remaining life) | (225,000 | ) | 3,525,000 | ||||
Goodwill | $ | 737,500 | |||||
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 | $ | 433,125 | $ | 25,000 |
2021 | 866,250 | 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 | $ | (6,900,000 | ) | $ | (4,025,000 | ) | |
Cost of goods sold | 4,850,000 | 2,581,250 | |||||
Depreciation expense | 1,000,000 | 352,000 | |||||
Amortization expense | 492,500 | 140,500 | |||||
Interest expense | 105,000 | 85,000 | |||||
Equity earnings in Mathias | (511,250 | ) | 0 | ||||
Net income | $ | (963,750 | ) | $ | (866,250 | ) | |
Statement of Retained Earnings | |||||||
Retained earnings 1/1 | $ | (5,590,000 | ) | $ | (2,033,125 | ) | |
Net income (above) | (963,750 | ) | (866,250 | ) | |||
Dividends declared | 560,000 | 50,000 | |||||
Retained earnings 12/31 | $ | (5,993,750 | ) | $ | (2,849,375 | ) | |
Balance Sheet | |||||||
Cash | $ | 112,500 | $ | 180,500 | |||
Accounts receivable | 1,075,000 | 287,500 | |||||
Inventory | 1,950,000 | 910,000 | |||||
Investment in Mathias | 6,901,875 | 0 | |||||
Equipment (net) | 3,950,000 | 2,139,500 | |||||
Patents | 157,500 | 0 | |||||
Unpatented technology | 2,250,000 | 1,575,000 | |||||
Goodwill | 512,500 | 0 | |||||
Total assets | $ | 16,909,375 | $ | 5,092,500 | |||
Accounts payable | $ | (1,715,625 | ) | $ | (543,125 | ) | |
Long-term debt | (1,000,000 | ) | (1,200,000 | ) | |||
Common stock | (8,200,000 | ) | (500,000 | ) | |||
Retained earnings 12/31 | (5,993,750 | ) | (2,849,375 | ) | |||
Total liabilities and equity | $ | (16,909,375 | ) | $ | (5,092,500 | ) | |
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 Allisons financial statements.
ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2021 Consolidation Entries Accounts Allison Mathias Debit Credit Consolidated Totals $ (6.900.000) 4,850,000 Income Statement Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Equity earnings in Mathias Net income S (4,025,000) 2.581,250 352,000 140,500 1,000,000 492,500 105,000 (511.250) (963.750) 85.000 S S (866,250) Statement of Retained Earnings Retained earnings 1/1 Net income (above) Dividends declared Retained earnings 12/31 (5.590.000) (963.750) 560.000 (2.033.125) (866,250) 50,000 S (2.849,375) S (5.993.750) Balance Sheet Cash S S 180.500 112,500 1,075,000 Accounts receivable 287,500 910,000 Inventories Investment in Mathias Equipment (net) Patents 1.950.000 6.901.875 3,950,000 157,500 2.250.000 2,139,500 Unpatented technology 1.575.000 Goodwill Total assets 512,500 $ 16,900.375 S 5,092,500 Accounts payable Long-term debt Common stock (1.715.625) (1.000.000) (8.200,000) (5.993.750) $(16.909.375) (543,125) (1.200.000) (500.000) (2.849,375) S (5.092,500) Retained earnings 12/31 Total liabilities and equity S 0 S 0 $ 18,787,500
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