Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $5,957,000 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 $2,020,000 including retained earnings of $1,520,000. At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary: Consideration transferred $ 5,957,000 Mathias stockholders' equity 2,020,000 Excess fair over book value $ 3,937,000 to unpatented technology (8-year remaining life) $ 832,000 to patents (10-year remaining life) 2,540,000 to increase long-term debt (undervalued, 5-year remaining life) (120,000 ) 3,252,000 Goodwill $ 685,000 Postacquisition, 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 $ 472,500 $ 25,000 2021 945,000 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 $ (6,480,000 ) $ (3,920,000 ) Cost of goods sold 4,556,000 2,513,000 Depreciation expense 895,000 289,000 Amortization expense 440,000 109,000 Interest expense 63,000 64,000 Equity earnings in Mathias (611,000 ) 0 Net income $ (1,137,000 ) $ (945,000 ) Statement of Retained Earnings Retained earnings 1/1 $ (5,380,000 ) $ (1,967,500 ) Net income (above) (1,137,000 ) (945,000 ) Dividends declared 560,000 50,000 Retained earnings 12/31 $ (5,957,000 ) $ (2,862,500 ) Balance Sheet Cash $ 81,000 $ 149,000 Accounts receivable 970,000 235,000 Inventory 1,740,000 805,000 Investment in Mathias 6,631,500 0 Equipment (net) 3,740,000 2,066,000 Patents 105,000 0 Unpatented technology 2,145,000 1,470,000 Goodwill 439,000 0 Total assets $ 15,851,500 $ 4,725,000 Accounts payable $ (694,500 ) $ (162,500 ) Long-term debt (1,000,000 ) (1,200,000 ) Common stock (8,200,000 ) (500,000 ) Retained earnings 12/31 (5,957,000 ) (2,862,500 ) Total liabilities and equity $ (15,851,500 ) $ (4,725,000 ) Required: Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.

Answer 1