In: Accounting
On January 1, 2017, Mona, Inc., acquired 80 percent of Lisa Company’s common stock as well as 60 percent of its preferred shares. Mona paid $78,000 in cash for the preferred stock, with a call value of 110 percent of the $50 per share par value. The remaining 40 percent of the preferred shares traded at a $47,000 fair value. Mona paid $584,000 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $146,000. The excess fair value over Lisa’s book value was attributed to franchise contracts of $73,000. This intangible asset is being amortized over a 40-year period. Lisa pays all preferred stock dividends (a total of $21,000 per year) on an annual basis. During 2017, Lisa’s book value increased by $70,000.
On January 2, 2017, Mona acquired one-half of Lisa's outstanding bonds payable to reduce the business combination's debt position. Lisa's bonds had a face value of $100,000 and paid cash interest of 8 percent per year. These bonds had been issued to the public to yield 10 percent. Interest is paid each December 31. On January 2, 2017, these bonds had a total $93,660 carrying amount. Mona paid $53,465, indicating an effective interest rate of 6 percent.
On January 3, 2017, Mona sold Lisa fixed assets that had originally cost $113,000 but had accumulated depreciation of $90,000 when transferred. The transfer was made at a price of $146,000. These assets were estimated to have a remaining useful life of 10 years.
The individual financial statements for these two companies for the year ending December 31, 2018, are as follows:
Mona, Inc. | Lisa Company | ||||||
Sales and other revenues | $ | (526,000 | ) | $ | (226,000 | ) | |
Expenses | 233,000 | 133,000 | |||||
Dividend income—Lisa common stock | (18,400 | ) | 0 | ||||
Dividend income—Lisa preferred stock | (12,600 | ) | 0 | ||||
Net income | $ | (324,000 | ) | $ | (93,000 | ) | |
Retained earnings, 1/1/18 | $ | (713,000 | ) | $ | (526,000 | ) | |
Net income (above) | (324,000 | ) | (93,000 | ) | |||
Dividends declared—common stock | 105,800 | 23,000 | |||||
Dividends declared—preferred stock | 0 | 21,000 | |||||
Retained earnings, 12/31/18 | $ | (931,200 | ) | $ | (575,000 | ) | |
Current assets | $ | 143,419 | $ | 513,000 | |||
Investment in Lisa—common stock | 584,000 | 0 | |||||
Investment in Lisa—preferred stock | 78,000 | 0 | |||||
Investment in Lisa—bonds | 51,833 | 0 | |||||
Fixed assets | 1,113,000 | 813,000 | |||||
Accumulated depreciation | (313,000 | ) | (213,000 | ) | |||
Total assets | $ | 1,657,252 | $ | 1,113,000 | |||
Accounts payable | $ | (413,052 | ) | $ | (115,472 | ) | |
Bonds payable | 0 | (100,000 | ) | ||||
Discount on bonds payable | 0 | 3,472 | |||||
Common stock | (313,000 | ) | (213,000 | ) | |||
Preferred stock | 0 | (113,000 | ) | ||||
Retained earnings, 12/31/18 | (931,200 | ) | (575,000 | ) | |||
Total liabilities and equities | $ | (1,657,252 | ) | $ | (1,113,000 | ) | |
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