Question
On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $6,978,000 in cash. Persoff elected
On January 3, 2019, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc., in exchange for $6,978,000 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 $2,533,000 including retained earnings of $1,733,000.
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 | $ | 155,000 | $ | 2,465,000 | 7 years |
Computer software | $ | 69,000 | $ | 1,989,000 | 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 | |||
2019 | $ | 900,600 | $ | 150,000 |
2020 | 940,600 | 150,000 | ||
2021 | 975,600 | 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 | $ | (2,780,000 | ) | $ | (2,280,000 | ) | ||
Cost of goods sold | 1,379,400 | 881,400 | ||||||
Depreciation expense | 290,000 | 392,000 | ||||||
Amortization expense | 388,000 | 31,000 | ||||||
Equity earnings in Sea Cliff | (485,600 | ) | 0 | |||||
Net income | $ | (1,208,200 | ) | $ | (975,600 | ) | ||
Statement of Retained Earnings | ||||||||
Retained earnings 1/1 | $ | (7,500,000 | ) | $ | (3,274,200 | ) | ||
Net income (above) | (1,208,200 | ) | (975,600 | ) | ||||
Dividends declared | 600,000 | 150,000 | ||||||
Retained earnings 12/31 | $ | (8,108,200 | ) | $ | (4,099,800 | ) | ||
Balance Sheet | ||||||||
Current assets | $ | 517,000 | $ | 390,000 | ||||
Investment in Sea Cliff | 7,874,800 | 0 | ||||||
Computer software | 330,000 | 54,000 | ||||||
Patented technology | 836,000 | 92,000 | ||||||
Goodwill | 112,000 | 0 | ||||||
Equipment | 1,856,000 | 4,560,000 | ||||||
Total assets | $ | 11,525,800 | $ | 5,096,000 | ||||
Liabilities | $ | (1,417,600 | ) | $ | (196,200 | ) | ||
Common stock | (2,000,000 | ) | (800,000 | ) | ||||
Retained earnings 12/31 | (8,108,200 | ) | (4,099,800 | ) | ||||
Total liabilities and equity | $ | (11,525,800 | ) | $ | (5,096,000 | ) | ||
Note: Parentheses indicate a credit balance.
-
Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.
-
Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2021.
-
Determine Persoff's December 31, 2021, Investment in Sea Cliff's balance.
-
Prepare a worksheet to determine the consolidated values to be reported on Persoffs financial statements.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started