Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2017, in exchange for $6,162,000 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 $2,070,000 including retained earnings of $1,570,000.

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

Consideration transferred					$	6,162,000
Mathias stockholders' equity						2,070,000
Excess fair over book value					$	4,092,000
to unpatented technology (8-year remaining life)	$	912,000
to patents (10-year remaining life)		2,640,000
to increase long-term debt (undervalued, 5-year remaining life)		(170,000	)			3,382,000
Goodwill					$	710,000

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
2017	$	453,750	$	25,000
2018		907,500		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	$	(6,680,000	)		$	(3,970,000	)
Cost of goods sold		4,696,000				2,545,500
Depreciation expense		945,000				319,000
Amortization expense		465,000				124,000
Interest expense		83,000				74,000
Equity earnings in Mathias		(563,500	)			0
Net income	$	(1,054,500	)		$	(907,500	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,480,000	)		$	(1,998,750	)
Net income (above)		(1,054,500	)			(907,500	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,974,500	)		$	(2,856,250	)
Balance Sheet
Cash	$	96,000			$	164,000
Accounts receivable		1,020,000				260,000
Inventory		1,840,000				855,000
Investment in Mathias		6,760,250				0
Equipment (net)		3,840,000				2,101,000
Patents		130,000				0
Unpatented technology		2,195,000				1,520,000
Goodwill		474,000				0
Total assets	$	16,355,250			$	4,900,000
Accounts payable	$	(1,180,750	)		$	(343,750	)
Long-term debt	$	(1,000,000	)		$	(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,974,500	)			(2,856,250	)
Total liabilities and equity	$	(16,355,250	)		$	(4,900,000	)

Required:

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

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

Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.)

ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Accounts Allison Mathias Debit Credit Consolidated Totals Income Statement Revenues $(6,680,000) $(3,970,000) Cost of goods sold 4,696,000 2,545,500 Depreciation expense 945,000 319,000 Amortization expense 465,000 124,000 Interest expense 83,000 74,000 Equity earnings in Mathias (563,500) Net income $(1,054,500) $(907,500) Statement of Retained Earnings Retained earnings 1/1 (5,480,000) (1,998,750) Net income (above) (1,054,500) (907,500) Dividends declared 560,000 50,000 Retained earnings 12/31 $(5,974,500) $(2,856,250) Balance Sheet Cash $96,000 $164,000 Accounts receivable 1,020,000 260,000 Inventories 1,840,000 855,000 Investment in Mathias 6,760,250 Equipment (net) 3,840,000 2,101,000 Patents 130,000 Unpatented technology 2,195,000 1,520,000 Goodwill 474,000 Total assets $16,355,250 $4,900,000 Accounts payable (1,180,750) (343,750) Long-term debt (1,000,000) (1,200,000) Common stock (8,200,000) (500,000) Retained earnings 12/31 (5,974,500) (2,856,250) Total liabilities and equity $(16,355,250) $(4,900,000)

Answer 1

1	Requirement
					Calculation of Amortization of excess fair value
	Determination of Investment Balance in Mathias
					Unpatented technology (8 yr remaining life)
	Calculation				($912000/8)
					$114,000
	Investment in Mathias				Patents (Remaining Life 10 yrs)
		Amt in $			($2640000/10)
	Balance of Investment as on 1st jan 2017	6162000			$264,000
	Add Income from Mathias in 2017	453750			Long Term Debt (Remaining 5 yr life)
		6615750			($170000/5)
	Less Dividend received	-25000			-34000
		6590750			$344,000
	Less Amortization in excess of fair value	-344000
	as calculated in WN
	Balance of Investment as on 1st Jan 2018	6246750
	Add Income from mathias in 2018	907500
		7154250
	Less Dividend received	-50000
		7104250
	Less Amortization in excess of fair value	-344000
	Investment balance as on 31st Dec 2018	6760250
2	Requirement
	Consolidation Worksheet
		Allison	Mathias	Dr	Cr	Combined
	Income Statement
	Sales	6680000	3970000			10650000
	Cost of Goods Sold	4696000	2545500			7241500
	Depreciation Expenese	945000	319000			1264000
	Amortization Expenses	465000	124000			589000
	Interest Expense	83000	74000			157000
	Equity Income from Mathias	563500	0			563500
	Net Income	1054500	907500			1962000
	Statement of Retained Earnings
	Retained Earnings as on 1/1	5480000	1998750			7478750
	Net Income (above)	1054500	907500			1962000
	Dividend declared	-560000	-50000			-610000
	Retained earnings as on 12/31	5974500	2856250			8830750
	Calculation of the following assets and liabilities being taken over by Allison
a	Patents	Fair Value $2640000 less amortization for two yrs @264000 ie ($2640000- 2*264000) ie $2112000
b	Unpatented technology	Fair Vaue $912000 less amortization for two yrs @114000 ie ($912000-$114000*2) ie $684000
c	Long Term Debt	Fair Value $170000 Less amortization for two yrs 34000 ie ($170000-2*34000) ie $102000
d	Common Stock and Retained Earnings are being brought in by Allison at the time of acquisition
e	Goodwill on purchase of $710000 is to be added
	Balance Sheet			Dr	Cr
	Cash	96000	164000			260000
	Accounts Receivable	1020000	260000			1280000
	Inventory	1840000	855000			2695000
	Investment in Mathias	6760250	0		6760250	0	This is eliminated as investment in affilaite
	Equipment Net	3840000	2101000			5941000
	Patents	130000	0	2112000		2242000
	Unpatented Technology	2195000	1520000	684000		4399000
	Goodwill	474000		710000		1184000
	Total Assets	16355250	4900000			18001000
	Accounts Payable	1180750	343750			1524500
	Long Term Debt	1000000	1200000		102000	2302000                  this is an addition since liability
	Common Stock	8200000	500000	500000		8200000
	Retained Earnings 12/31	5974500	2856250	2856250		5974500
	Total Liabilities and Equity	16355250	4900000	6862250	6862250	18001000