On January 3, 2013, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc.
Question:
On January 3, 2013, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $6,000,000 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 $2,500,000 including retained earnings of $1,700,000. 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 $ 140,000 $ 2,240,000 7 years Computer software 60,000 1,260,000 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 2013 $ 900,000 $ 150,000 2014 940,000 150,000 2015 975,000 150,000 December 31, 2015, financial statements for each company appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period. Persoff Sea Cliff Income Statement Revenues $ (2,720,000 ) $ (2,250,000 ) Cost of goods sold 1,350,000 870,000 Depreciation 275,000 350,000 Amortization 370,000 55,000 Equity earnings in Sea Cliff (575,000 ) 0 Net income $ (1,300,000 ) $ (975,000 ) Statement of Retained Earnings Retained earnings, 1/1 $ (7,470,000 ) $ (3,240,000 ) Net income (above) (1,300,000 ) (975,000 ) Dividends declared 600,000 150,000 Retained earnings, 12/31 $ (8,170,000 ) $ (4,065,000 ) Balance Sheet Current assets $ 490,000 $ 375,000 Investment in Sea Cliff 7,165,000 0 Computer software 300,000 45,000 Patented technology 800,000 80,000 Goodwill 100,000 0 Equipment 1,835,000 4,500,000 Total assets $ 10,690,000 $ 5,000,000 Liabilities $ (520,000 ) $ (135,000 ) Common stock (2,000,000 ) (800,000 ) Retained earnings, 12/31 (8,170,000 ) (4,065,000 ) Total liabilities and equity $ (10,690,000 ) $ (5,000,000 ) Note: Parentheses indicate a credit balance. a. Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff. b. Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2015. c. Determine Persoff's December 31, 2015, Investment in Sea Cliff's balance. d. Prepare a worksheet to determine the consolidated values to be reported on Persoff?s financial statements. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)
On January 3, 2013, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $6,000,000 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 $2,500,000 including retained earnings of $1,700,000. 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 Patented technology Computer software Remaining Book Value Fair Value Useful Life $ 140,000 $ 2,240,000 7 years 60,000 1,260,000 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 Dividends Income 2013 $ 900,000 $ 150,000 2014 940,000 150,000 2015 975,000 150,000 December 31, 2015, financial statements for each company appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period. Persoff Inco me Statem ent Reve $ (2,720,) Sea Cliff $ (2,250,) nues Cost of goods sold Depre ciation Amort ization Equity earning s in Sea Cliff Net income State ment of Retain ed Earnin gs Retai ned earning s, 1/1 Net income (above ) Divide nds declare d Retai 000 000 1,350,0 00 870,00 0 275,00 0 370,00 0 350,00 0 55,000 (575,0 ) 00 0 $ (1,300, ) 000 $ (975,0 ) 00 $ (7,470, ) 000 $ (3,240, ) 000 (1,300, ) 000 (975,0 ) 00 600,00 0 150,00 0 $ (8,170,) $ (4,065,) ned earning s, 12/31 Balan ce Sheet Curre nt assets Invest ment in Sea Cliff Comp uter softwar e Paten ted technol ogy Good will Equip ment Total assets Liabili ties Com mon stock Retai ned 000 $ 490,00 0 000 $ 375,00 0 7,165,0 00 0 300,00 0 45,000 800,00 0 80,000 100,00 0 1,835,0 00 $ $ 10,690, 000 (520,0 ) 00 0 4,500,0 00 $ $ 5,000,0 00 (135,0 ) 00 (2,000, ) 000 (800,0 ) 00 (8,170,) 000 (4,065,) 000 earning s, 12/31 Total liabilitie s and equity $ (10,69 ) 0,000 $ (5,000, ) 000 Note: Parentheses indicate a credit balance. a. Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff. b. Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2015. c. Determine Persoff's December 31, 2015, Investment in Sea Cliff's balance. d. Prepare a worksheet to determine the consolidated values to be reported on Persoff's financial statements. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.) Expert Answer:
