Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2017, in exchange for $6,305,500 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s stockholders’ equity was $2,105,000 including retained earnings of $1,605,000.

At the acquisition date, Allison prepared the following fair value allocation schedule for its newly acquired subsidiary:

Consideration transferred					$	6,305,500
Mathias stockholders' equity						2,105,000
Excess fair over book value					$	4,200,500
to unpatented technology (8-year remaining life)	$	968,000
to patents (10-year remaining life)		2,710,000
to increase long-term debt (undervalued, 5-year remaining life)		(205,000	)			3,473,000
Goodwill					$	727,500

Post-acquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends:

	Income		Dividends
2017	$	440,625	$	25,000
2018		881,250		50,000

No asset impairments have occurred since the acquisition date.

Individual financial statements for each company as of December 31, 2018, appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period.

	Allison				Mathias
Income Statement
Sales	$	(6,820,000	)		$	(4,005,000	)
Cost of goods sold		4,794,000				2,568,250
Depreciation expense		980,000				340,000
Amortization expense		482,500				134,500
Interest expense		97,000				81,000
Equity earnings in Mathias		(530,250	)			0
Net income	$	(996,750	)		$	(881,250	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,550,000	)		$	(2,020,625	)
Net income (above)		(996,750	)			(881,250	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,986,750	)		$	(2,851,875	)
Balance Sheet
Cash	$	106,500			$	174,500
Accounts receivable		1,055,000				277,500
Inventory		1,910,000				890,000
Investment in Mathias		6,850,375				0
Equipment (net)		3,910,000				2,125,500
Patents		147,500				0
Unpatented technology		2,230,000				1,555,000
Goodwill		498,500				0
Total assets	$	16,707,875			$	5,022,500
Accounts payable	$	(1,521,125	)		$	(470,625	)
Long-term debt	$	(1,000,000	)		$	(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,986,750	)			(2,851,875	)
Total liabilities and equity	$	(16,707,875	)		$	(5,022,500	)

Required:

1. Determine Allison's December 31, 2018, Investment in Mathias balance.

2. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.

Answer 1

Answer:

Part A
Consideration Transferred			$6,305,500
Add: Net Income (net of Amortization)
2017	$440,625-$351,000	$       89,625
2018	$881,250-$351,000	$     530,250	$   619,875
Dividend Since Acquisition			$    -75,000
Investment Balance at Dec 31 2018			$6,850,375
Amortization:
Technology	968000/8	$     121,000
Patents	2710000/10	$     271,000
Long term Debt	205000/5	$     -41,000
Amortization		$     351,000
Part B
				Consolidation Entries
Income Statement	Allison	Mathias	Debit	Credit	Consolidated
Sales	$             -6,820,000	$-4,005,000					$-10,825,000
Cost of goods sold	$               4,794,000	$ 2,568,250					$    7,362,250
Depreciation expense	$                  980,000	$     340,000					$    1,320,000
Amortization expense	$                  482,500	$     134,500	E	$   392,000			$    1,009,000
Interest expense	$                    97,000	$       81,000			E	$     41,000	$       137,000
Equity earnings in Mathias	$                -530,250	$               -	I	$   530,250			$                 -
Net income	$                -996,750	$   -881,250					$     -996,750
Statement of Retained Earnings
Retained earnings 1/1	$             -5,550,000	$-2,020,625	S	$2,020,625			$ -5,550,000
Net income (above)	$                -996,750	$   -881,250					$     -996,750
Dividends declared	$                  560,000	$       50,000			D	$     50,000	$       560,000
Retained earnings 12/31	$             -5,986,750	$-2,851,875					$ -5,986,750
Balance Sheet
Cash	$                  106,500	$     174,500					$       281,000
Accounts receivable	$               1,055,000	$     277,500					$    1,332,500
Inventories	$               1,910,000	$     890,000					$    2,800,000
Investment in Mathias	$               6,850,375		D	$     50,000	S	$2,520,625	$                 -
					A	$3,849,500
					I	$   530,250
Equipment (net)	$               3,910,000	$ 2,125,500					$    6,035,500
Patents	$                  147,500		A	$2,439,000	E	$   271,000	$    2,315,500
Unpatented technology	$               2,230,000	$ 1,555,000	A	$   847,000	E	$   121,000	$    4,511,000
Goodwill	$                  498,500		A	$   727,500			$    1,226,000
Total assets	$            16,707,875	$ 5,022,500					$ 18,501,500
Accounts payable	$             -1,521,125	$   -470,625					$ -1,991,750
Long-term debt	$             -1,000,000	$-1,200,000	E	$     41,000	A	$   164,000	$ -2,323,000
Common stock	$             -8,200,000	$   -500,000	S	$   500,000			$ -8,200,000
Retained earnings 12/31	$             -5,986,750	$-2,851,875					$ -5,986,750
Total liabilities and equity	$           -16,707,875	$-5,022,500		$7,130,000	$7,130,000		$-18,501,500