Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $5,998,000 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 $2,030,000 including retained earnings of $1,530,000.

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

Consideration transferred					$	5,998,000
Mathias stockholders' equity						2,030,000
Excess fair over book value					$	3,968,000
to unpatented technology (8-year remaining life)	$	848,000
to patents (10-year remaining life)		2,560,000
to increase long-term debt (undervalued, 5-year remaining life)		(130,000	)			3,278,000
Goodwill					$	690,000

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
2020	$	468,750	$	25,000
2021		937,500		50,000

No asset impairments have occurred since the acquisition date.

Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period

Allison				Mathias
Income Statement

Sales	$	(6,520,000	)		$	(3,930,000	)
Cost of goods sold		4,584,000				2,519,500
Depreciation expense		905,000				295,000
Amortization expense		445,000				112,000
Interest expense		67,000				66,000
Equity earnings in Mathias		(601,500	)			0
Net income	$	(1,120,500	)		$	(937,500	)

Statement of Retained Earnings
Retained earnings 1/1	$	(5,400,000	)		$	(1,973,750	)
Net income (above)		(1,120,500	)			(937,500	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,960,500	)		$	(2,861,250	)

Balance Sheet
Cash	$	84,000			$	152,000
Accounts receivable		980,000				240,000
Inventory		1,760,000				815,000
Investment in Mathias		6,657,250				0
Equipment (net)		3,760,000				2,073,000
Patents		110,000				0
Unpatented technology		2,155,000				1,480,000
Goodwill		446,000				0
Total assets	$	15,952,250			$	4,760,000

Accounts payable	$	(791,750	)		$	(198,750	)
Long-term debt		(1,000,000	)			(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,960,500	)			(2,861,250	)

Total liabilities and equity$(15,952,250) $(4,760,000)

1. Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias.

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

Answer 1