Question

On January 1, 2017, Paloma Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of San Marco Company. The consideration transferred by Paloma provided a reasonable basis for assessing the total January 1, 2017, fair value of San Marco Company. At the acquisition date, San Marco reported the following owners’ equity amounts in its balance sheet:

Common stock $400,000

Additional paid-in capital              60,000

Retained earnings           265,000

In determining its acquisition offer, Paloma noted that the values for San Marco’s recorded assets and liabilities approximated their fair values. Paloma also observed that San Marco had developed internally a customer base with an assessed fair value of $800,000 that was not reflected on San Marco’s books. Paloma expected both cost and revenue synergies from the combination.

At the acquisition date, Paloma prepared the following fair-value allocation schedule:

Fair value of San Marco Company             $1,900,000

Book value of San Marco Company          725,000

Excess fair value               1,175,000

to customer base (10-year remaining life)            ????800,000

to goodwill          $???375,000

At December 31, 2018, the two companies report the following balances:

               

	Paloma	San Marco
Revenues	$?(1,843,000)	$??(675,000)
Cost of goods sold	1,100,000??	322,000??
Depreciation expense	125,000??	120,000??
Amortization expense	275,000??	11,000??
Interest expense	27,500??	7,000??
Equity in income of San Marco	?????(121,500)	????????–0–??
Net income	$????(437,000)	$??(215,000)
Retained earnings, 1/1	$?(2,625,000)	$??(395,000)
Net income	(437,000)	(215,000)
Dividends declared	?????350,000??	?????25,000??
Retained earnings, 12/31	$?(2,712,000)	$??(585,000)
Current assets	$???1,204,000??	$????430,000??
Investment in San Marco	1,854,000??	–0–??
Buildings and equipment	931,000??	863,000??
Copyrights	?????950,000??	????107,000??
Total assets	$???4,939,000??	$??1,400,000??
Accounts payable	$????(485,000)	$??(200,000)
Notes payable	(542,000)	(155,000)
Common stock	(900,000)	(400,000)
Additional paid-in capital	(300,000)	(60,000)
Retained earnings, 12/31	??(2,712,000)	????(585,000)
Total liabilities and equities	$?(4,939,000)	$(1,400,000)

At year-end, there were no intra-entity receivables or payables.

*Determine the consolidated balances for this business combination as of December 31, 2018.

Answer 1

PALOMA CORPORATION AND SAN MARCO COMPANY Consolidation Worksheet For Year Ending December 31, 2018
Accounts	Paloma	San Marco	Adjustments and eliminations		Non Controlling Interest	consolidated Totals
			Debit	Credit
Revenues	-1,843,000	-675,000				-2,518,000
Cost of goods sold	1,100,000	322,000				1,422,000
Depriciation expense	125,000	120,000				245,000
Amortization Expense	275,000	11,000	80000			366,000
Interest expense	27,500	7,000				34,500
Equity in income of San Marco	-121,500		121,500			0
Net income	-437,000	-215,000
Consolidated net income						-450,500
To noncontrolling interest					-13500	13500
To Paloma Company						-437,000
Retained Earnings 1/1	-2,625,000	-395,000	395,000			-2,625,000
Net Income	-437,000	-215,000				-437,000
Dividend Declared	350,000	25,000		22500	2,500	350,000
Retained Earnings 12/31	-2,712,000	-585,000				-2,712,000
Current Assets	1,204,000	430,000				1,634,000
Investment in San Marco	1,854,000		22500	1,876,500		0
Customer base	0	0	720000	80000		640000
Buildings and Equipment	931,000	863,000				1,794,000
Copyrights	950,000	107,000				1,057,000
Goodwill			375,000			375,000
Total Assets	4,939,000	1,400,000				5,500,000
Accounts Payable	-485,000	-200,000				-685,000
Notes Payable	-542,000	-155,000				-697,000
NCI in San Marco				195,000	-195,000	0
					-206,000	-206,000
Common Stock	-900,000	-400000	400000			-900,000
Additional Paid-In Capital	-300,000	-60,000	60,000			-300,000
Retained Earnings 12/31	-2,712,000	-585,000				-2,712,000
Total Liabilities and shareholders equity	-4,939,000	-1,400,000	2174000	2174000		-5,500,000
25000*90% = 22500
Customer base 800000*90% = 720000