Question

On January 3, 2016, 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 Cliff’s stockholders’ equity was $2,549,500 including retained earnings of $1,749,500.

Persoff pursued the acquisition, in part, to utilize Sea Cliff’s technology and computer software. These items had fair values that differed from their values on Sea Cliff’s 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 Cliff’s 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	$	900,900	$	150,000
2017		940,900		150,000
2018		975,900		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	$	(2,810,000	)		$	(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.

1-Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.

2-Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2018.

3-Determine Persoff's December 31, 2018, Investment in Sea Cliff's balance.

4-Prepare a worksheet to determine the consolidated values to be reported on Persoff’s financial statements.

Answer 1

PART 1

Sea Cliff acquisition-date fair value = 7,467,000

Sea Cliff book value = 2,549,500

Fair value in excess of book value = 4907500

Excess assigned to specific accounts based on fair value

		Remaining useful life	amortization
Computer software	2280000 (2353500-73500)	12	190000
Patented technology	2415000 (2577500-162500)	7	345000
Goodwill	212500 (4907500-2280000-2415000)	Indefinite	0
total	4907500		535000

PART 2

Equity earnings in Sea Cliff = net income of sea cliff – amortization expense = 975900-535000 = 440900

PART 3

Investment in Sea Cliff:                                

Fair value at 1/1/16 =7,467,000

Persoff's equity in Sea Cliff earnings (net of amortization):

..... 2016 (900900-535000) = $365900

..... 2017 (940900-535000) = $405900

..... 2018 (975900-535000) =440900

Post-acquisition earnings net of amortization= 1212700

Sea Cliff dividends since acquisition= (450,000)

Investment balance at 12/31/18 = $8229700

PART 4

PERSOFF COMPANY AND CONSOLIDATED SUBSIDIARY

Consolidation Worksheet

For Year Ending December 31, 2018

Income Statement	Persoff	Sea Cliff	Adjustments & Eliminations		Consolidated
Revenues	(2810000)	(2295000)			(5105000)
Cost of goods sold	1394100	887100			2281200
Depreciation	297500	398000			695500
Amortization	397000	34000	535000		966000
Equity earnings in Sea Cliff	(440900)		440900		0
Net income	(1162300)	(975900)			(1162300)
Statement of Retained Earnings
Retained earnings 1/1	(7515000)	(3291300)	3291300		(7515000)
Net income (above)	(1162300)	(975900)			(1162300)
Dividends declared	600000	150000		150000	600000
Retained earnings 12/31	(8077300)	(4117200)			(8077300)
Balance Sheet
Current assets	530500	397500			928000
Investment in Sea Cliff	8229700	0	150000	8379700	0
Computer software	345000	58500	1454000	190000	1667500
Patented technology	854000	98000	2181000	345000	2788000
Goodwill	118000	0	212500		330500
Equipment	1866500	4590000			6456500
Total assets	11943700	5144000			12170500
Liabilities	(1866400)	(226800)			(2093200)
Common stock	(2000000)	(800000)	800000		(2000000)
Retained earnings 12/31	(8077300)	(4117200)			(8077300)
Total liabilities and equity	(11943700)	(5144000)			(12170500)