Question
On January 1, 2020, Paloma Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of San Marco Company. The consideration transferred by
On January 1, 2020, Paloma Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of San Marco Company. The consideration transferred by Paloma provided a reasonable basis for assessing the total January 1, 2020, fair value of San Marco Company. At the acquisition date, San Marco reported the following owners equity amounts in its balance sheet:
Common stock | $ | 400,000 | |
Additional paid-in capital | 60,000 | ||
Retained earnings | 265,000 | ||
In determining its acquisition offer, Paloma noted that the values for San Marcos recorded assets and liabilities approximated their fair values. Paloma also observed that San Marco had developed internally a customer base with an assessed fair value of $800,000 that was not reflected on San Marcos books. Paloma expected both cost and revenue synergies from the combination. At the acquisition date, Paloma prepared the following fair-value allocation schedule:
Fair value of San Marco Company | $ | 1,900,000 | |
Book value of San Marco Company | 725,000 | ||
Excess fair value | 1,175,000 | ||
to customer base (10-year remaining life) | 800,000 | ||
to goodwill | $ | 375,000 | |
At December 31, 2021, the two companies report the following balances:
Paloma | San Marco | ||||||
Revenues | $ | (1,843,000 | ) | $ | (675,000 | ) | |
Cost of goods sold | 1,100,000 | 322,000 | |||||
Depreciation expense | 125,000 | 120,000 | |||||
Amortization expense | 275,000 | 11,000 | |||||
Interest expense | 27,500 | 7,000 | |||||
Equity in income of San Marco | (121,500 | ) | 0 | ||||
Net income | $ | (437,000 | ) | $ | (215,000 | ) | |
Retained earnings, 1/1 | $ | (2,625,000 | ) | $ | (395,000 | ) | |
Net income | (437,000 | ) | (215,000 | ) | |||
Dividends declared | 350,000 | 25,000 | |||||
Retained earnings, 12/31 | $ | (2,712,000 | ) | $ | (585,000 | ) | |
Current assets | $ | 1,204,000 | $ | 430,000 | |||
Investment in San Marco | 1,854,000 | 0 | |||||
Buildings and equipment | 931,000 | 863,000 | |||||
Copyrights | 950,000 | 107,000 | |||||
Total assets | $ | 4,939,000 | $ | 1,400,000 | |||
Accounts payable | $ | (485,000 | ) | $ | (200,000 | ) | |
Notes payable | (542,000 | ) | (155,000 | ) | |||
Common stock | (900,000 | ) | (400,000 | ) | |||
Additional paid-in capital | (300,000 | ) | (60,000 | ) | |||
Retained earnings, 12/31 | (2,712,000 | ) | (585,000 | ) | |||
Total liabilities and equities | $ | (4,939,000 | ) | $ | (1,400,000 | ) | |
At year-end, there were no intra-entity receivables or payables.
If instead the noncontrolling interests acquisition-date fair value is assessed at $167,500, what changes would be evident in the consolidated statements?
Required: Determine the consolidated balances for this business combination as of December 31, 2021. Please show the Consolidation Worksheet (Both companied use Equity Method)
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