Question

Allen Company acquired 100 percent of Bradford Company’s voting stock on January 1, 2014, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $15 per share). As of that date, Bradford had stockholders’ equity totaling $106,800. Land shown on Bradford’s accounting records was undervalued by $13,200. Equipment (with a five-year remaining life) was undervalued by $9,600. A secret formula developed by Bradford was appraised at $20,400 with an estimated life of 20 years. Following are the separate financial statements for the two companies for the year ending December 31, 2018. There were no intra-entity payables on that date. Credit balances are indicated by parentheses. Allen Company Bradford Company Revenues $ (542,000 ) $ (220,000 ) Cost of goods sold 179,000 82,000 Depreciation expense 135,000 60,300 Subsidiary earnings (74,760 ) 0 Net income $ (302,760 ) $ (77,700 ) Retained earnings, 1/1/18 $ (792,000 ) $ (124,200 ) Net income (above) (302,760 ) (77,700 ) Dividends declared 175,500 40,000 Retained earnings ,12/31/18 $ (919,260 ) $ (161,900 ) Current assets $ 300,000 $ 88,000 Investment in Bradford 255,400 0 Company Land 490,000 72,000 Buildings and equipment (net) 744,000 164,000 Total assets $ 1,789,400 $ 324,000 Current liabilities $ (180,140 ) $ (97,100 ) Common stock (600,000 ) (60,000 ) Additional paid-in capital (90,000 ) (5,000 ) Retained earnings, 12/31/18 (919,260 ) (161,900 ) Total liabilities and equity $ (1,789,400 ) $ (324,000 ) a-1. Complete the table to show the allocation of the fair value in excess of book value. a-2. What balance will Allen show in its Subsidiary Earnings account? b. Complete the worksheet by consolidating the financial information for these two companies.

Answer 1

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Part a1
Bradford's acquisition Date Fair value	10,000*$15		$          150,000
Less: Book Value of Bradford's net asset			$         -106,800
Excess of Fair Value			$            43,200
Allocation:				Life	Amortization		4 year Amortization	Balance
Land			$            13,200		$                 -
Equipment			$              9,600	5 Year	$           1,920		$                      7,680	$           1,920
Secret Formula			$            20,400	20 year	$           1,020		$                      4,080	$         16,320
			$            43,200		$           2,940
Part a2	Equity Method
Share of Net income of Bradford's		$         77,700
Less: Amortization		$          -2,940
Subsidiary Earning for Allen		$         74,760
Part b
		Allen	Bradford	Debit		Credit		Consolidated
Income Statement
Revenues		$     -542,000	$         -220,000					$     -762,000
Cost of goods sold		$       179,000	$            82,000					$       261,000
Depreciation expense		$       135,000	$            60,300	E	$           1,920			$       197,220
Amortization expense		$                 -	$                     -	E	$           1,020			$           1,020
Equity in subsidiary earnings		$        -74,760	$                     -	I	$         74,760			$                 -
Net income		$     -302,760	$           -77,700		$         77,700			$     -302,760
Statement of Retained Earnings
Retained earnings 1/1		$     -792,000	$         -124,200	S	$       124,200			$     -792,000
Net income (above)		$     -302,760	$           -77,700					$     -302,760
Dividends declared		$       175,500	$            40,000			D	$                    40,000	$       175,500
Retained earnings 12/31		$     -919,260	$         -161,900					$     -919,260
Balance Sheet
Current assets		$       300,000	$            88,000					$       388,000
Investment in Bradford Co.		$       255,400	$                     -	D	$         40,000	S	$                  189,200	$                 -
						A	$                    31,440
						I	$                    74,760
Land		$       490,000	$            72,000	A	$         13,200			$       575,200
Buildings and equipment (net)		$       744,000	$          164,000	A	$           1,920	E	$                      1,920	$       908,000
Formula		$                 -	$                     -	A	$         16,320	E	$                      1,020	$         15,300
Total assets		$    1,789,400	$          324,000	$294,000				$    1,886,500
Current liabilities		$     -180,140	$           -97,100					$     -277,240
Common stock		$     -600,000	$           -60,000	S	$         60,000			$     -600,000
Additional paid-in capital		$        -90,000	$             -5,000	S	$           5,000			$        -90,000
Retained earnings 12/31		$     -919,260	$         -161,900					$     -919,260
Total liabilities and equity		$ -1,789,400	$         -324,000					$ -1,886,500