Question

On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $9,260,000 in cash. Persoff elected to exercise control over Sea Cliff as a wholly owned subsidiary with an independent accounting system. Both companies have December 31 fiscal year-ends. At the acquisition date, Sea Cliff’s stockholders’ equity was $2,610,000 including retained earnings of $1,810,000.

Persoff pursued the acquisition, in part, to utilize Sea Cliff’s technology and computer software. These items had fair values that differed from their values on Sea Cliff’s books as follows:

Asset	Book Value		Fair Value		Remaining Useful Life
Patented technology	$	190,000	$	2,990,000	7 years
Computer software		90,000		3,690,000	12 years

Sea Cliff’s remaining identifiable assets and liabilities had acquisition-date book values that closely approximated fair values. Since acquisition, no assets have been impaired. During the next three years, Sea Cliff reported the following income and dividends:

	Net Income		Dividends
2016	$	902,000	$	150,000
2017		942,000		150,000
2018		977,000		150,000

December 31, 2018, financial statements for each company appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period.

	Persoff				Sea Cliff
Income Statement
Revenues	$	(2,920,000	)		$	(2,350,000	)
Cost of goods sold		1,448,000				908,000
Depreciation expense		325,000				420,000
Amortization expense		430,000				45,000
Equity earnings in Sea Cliff		(277,000	)			0
Net income	$	(994,000	)		$	(977,000	)
Statement of Retained Earnings
Retained earnings 1/1	$	(7,570,000	)		$	(3,354,000	)
Net income (above)		(994,000	)			(977,000	)
Dividends declared		600,000				150,000
Retained earnings 12/31	$	(7,964,000	)		$	(4,181,000	)
Balance Sheet
Current assets	$	580,000			$	425,000
Investment in Sea Cliff		9,531,000				0
Computer software		400,000				75,000
Patented technology		920,000				120,000
Goodwill		140,000				0
Equipment		1,905,000				4,700,000
Total assets	$	13,476,000			$	5,320,000
Liabilities	$	(3,512,000	)		$	(339,000	)
Common stock		(2,000,000	)			(800,000	)
Retained earnings 12/31		(7,964,000	)			(4,181,000	)
Total liabilities and equity	$	(13,476,000	)		$	(5,320,000	)

Note: Parentheses indicate a credit balance.

1. Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.

2. Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2018.

3. Determine Persoff's December 31, 2018, Investment in Sea Cliff's balance.

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

Answer 1

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Part a
Sea Cliff acquisition-date fair value		$      9,260,000
Sea Cliff book value		$    (2,610,000)
Fair value in excess of book value		$      6,650,000
Allocation:
		Allocation		Life		Amortization
Computer software		$      3,600,000		12		$              300,000
Patented technology		$      2,800,000		7		$              400,000
Goodwill		$          250,000
Total		$      6,650,000				$              700,000
Part b
Net Income of Sea cliff		$          977,000
Less: Amortization (Part-1)		$       (700,000)
Persoff Equity earning in Sea cliff		$          277,000
Part c
Fair value at 1/3/16		$      9,260,000
Persoff's equity in Sea Cliff earnings(net of amortization):
Year 2016	$            202,000
Year 2017	$            242,000
Year 2018	$            277,000
Post-acquisition earnings net of amortization		$          721,000
Sea Cliff dividends since acquisition		$       (450,000)
Investment balance at 12/31/18		$      9,531,000
Part d
	Persoff	Sea Cliff	Debit		Credit		Consolidated
Income Statement:
Revenues	$      (2,920,000)	$    (2,350,000)					$                  (5,270,000)
Cost of goods sold	$        1,448,000	$          908,000					$                    2,356,000
Depreciation expense	$            325,000	$          420,000					$                        745,000
Amortization expense	$            430,000	$            45,000	E	$         700,000			$                    1,175,000
Equity earnings in Sea Cliff	$         (277,000)		I	$         277,000			$                                   -
Net income	$         (994,000)	$       (977,000)					$                     (994,000)
Statement of Retained Earnings:
Retained earnings 1/1	$      (7,570,000)	$    (3,354,000)		$     3,354,000			$                  (7,570,000)
Net income (above)	$         (994,000)	$       (977,000)					$                     (994,000)
Dividends declared	$            600,000	$          150,000			D	$              150,000	$                        600,000
Retained earnings 12/31	$      (7,964,000)	$    (4,181,000)					$                  (7,964,000)
Balance Sheet:
Current assets	$            580,000	$          425,000					$                    1,005,000
Investment in Sea Cliff	$        9,531,000		D	$         150,000	I	$              277,000	$                                   -
					S	$          4,154,000
					A	$          5,250,000
Computer software	$            400,000	$            75,000	A	$     3,000,000	E	$              300,000	$                    3,175,000
Patented technology	$            920,000	$          120,000	A	$     2,000,000	E	$              400,000	$                    2,640,000
Goodwill	$            140,000	$                     -	A	$         250,000			$                        390,000
Equipment	$        1,905,000	$      4,700,000					$                    6,605,000
Total assets	$      13,476,000	$      5,320,000					$                  13,815,000
Liabilities	$      (3,512,000)	$       (339,000)					$                  (3,851,000)
Common stock	$      (2,000,000)	$       (800,000)	S	$         800,000			$                  (2,000,000)
Retained earnings 12/31	$      (7,964,000)	$    (4,181,000)					$                  (7,964,000)
Total liabilities and equity	$   (13,476,000)	$    (5,320,000)		$     7,865,000		$          7,865,000	$               (13,815,000)