Question
On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $7,467,000 in cash. Persoff elected
On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $7,467,000 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 $2,549,500 including retained earnings of $1,749,500.
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 | $ | 162,500 | $ | 2,577,500 | 7 years |
Computer software | $ | 73,500 | $ | 2,353,500 | 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 | |||
2019 | $ | 900,900 | $ | 150,000 |
2020 | 940,900 | 150,000 | ||
2021 | 975,900 | 150,000 | ||
December 31, 2021, financial statements for each company follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.
Persoff | Sea Cliff | |||||||
Income Statement | ||||||||
Revenues | $ | (2,810,000 | ) | $ | (2,295,000 | ) | ||
Cost of goods sold | 1,394,100 | 887,100 | ||||||
Depreciation expense | 297,500 | 398,000 | ||||||
Amortization expense | 397,000 | 34,000 | ||||||
Equity earnings in Sea Cliff | (440,900 | ) | 0 | |||||
Net income | $ | (1,162,300 | ) | $ | (975,900 | ) | ||
Statement of Retained Earnings | ||||||||
Retained earnings 1/1 | $ | (7,515,000 | ) | $ | (3,291,300 | ) | ||
Net income (above) | (1,162,300 | ) | (975,900 | ) | ||||
Dividends declared | 600,000 | 150,000 | ||||||
Retained earnings 12/31 | $ | (8,077,300 | ) | $ | (4,117,200 | ) | ||
Balance Sheet | ||||||||
Current assets | $ | 530,500 | $ | 397,500 | ||||
Investment in Sea Cliff | 8,229,700 | 0 | ||||||
Computer software | 345,000 | 58,500 | ||||||
Patented technology | 854,000 | 98,000 | ||||||
Goodwill | 118,000 | 0 | ||||||
Equipment | 1,866,500 | 4,590,000 | ||||||
Total assets | $ | 11,943,700 | $ | 5,144,000 | ||||
Liabilities | $ | (1,866,400 | ) | $ | (226,800 | ) | ||
Common stock | (2,000,000 | ) | (800,000 | ) | ||||
Retained earnings 12/31 | (8,077,300 | ) | (4,117,200 | ) | ||||
Total liabilities and equity | $ | (11,943,700 | ) | $ | (5,144,000 | ) | ||
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, 2021.
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Determine Persoff's December 31, 2021, 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.
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