Question
On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $7,956,000 in cash. Persoff elected
On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $7,956,000 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 Cliffs stockholders equity was $2,566,000 including retained earnings of $1,766,000.
Persoff pursued the acquisition, in part, to utilize Sea Cliffs technology and computer software. These items had fair values that differed from their values on Sea Cliffs books as follows:
Asset | Book Value | Fair Value | Remaining Useful Life | ||
Patented technology | $ | 170,000 | $ | 2,690,000 | 7 years |
Computer software | 78,000 | 2,718,000 | 12 years | ||
Sea Cliffs 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 | |||
2016 | $ | 901,200 | $ | 150,000 |
2017 | 941,200 | 150,000 | ||
2018 | 976,200 | 150,000 | ||
December 31, 2018, 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 | $ | (2,840,000 | ) | $ | (2,310,000 | ) | ||
Cost of goods sold | 1,408,800 | 892,800 | ||||||
Depreciation expense | 305,000 | 404,000 | ||||||
Amortization expense | 406,000 | 37,000 | ||||||
Equity earnings in Sea Cliff | (396,200 | ) | 0 | |||||
Net income | $ | (1,116,400 | ) | $ | (976,200 | ) | ||
Statement of Retained Earnings | ||||||||
Retained earnings 1/1 | $ | (7,530,000 | ) | $ | (3,308,400 | ) | ||
Net income (above) | (1,116,400 | ) | (976,200 | ) | ||||
Dividends declared | 600,000 | 150,000 | ||||||
Retained earnings 12/31 | $ | (8,046,400 | ) | $ | (4,134,600 | ) | ||
Balance Sheet | ||||||||
Current assets | $ | 544,000 | $ | 405,000 | ||||
Investment in Sea Cliff | 8,584,600 | 0 | ||||||
Computer software | 360,000 | 63,000 | ||||||
Patented technology | 872,000 | 104,000 | ||||||
Goodwill | 124,000 | 0 | ||||||
Equipment | 1,877,000 | 4,620,000 | ||||||
Total assets | $ | 12,361,600 | $ | 5,192,000 | ||||
Liabilities | $ | (2,315,200 | ) | $ | (257,400 | ) | ||
Common stock | (2,000,000 | ) | (800,000 | ) | ||||
Retained earnings 12/31 | (8,046,400 | ) | (4,134,600 | ) | ||||
Total liabilities and equity | $ | (12,361,600 | ) | $ | (5,192,000 | ) | ||
Note: Parentheses indicate a credit balance.
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Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.
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Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2018.
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Determine Persoff's December 31, 2018, Investment in Sea Cliff's balance.
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Prepare a worksheet to determine the consolidated values to be reported on Persoffs financial statements.
PLEASE HELP WITH PART 4
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