On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff,...
On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $8,608,000 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 $2,588,000 including retained earnings of $1,788,000.
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 | $ | 180,000 | $ | 2,840,000 | 7 years |
| Computer software | 84,000 | 3,204,000 | 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 | $ | 901,600 | $ | 150,000 |
| 2017 | 941,600 | 150,000 | ||
| 2018 | 976,600 | 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 | $ | (2,880,000 | ) | $ | (2,330,000 | ) | ||
| Cost of goods sold | 1,428,400 | 900,400 | ||||||
| Depreciation expense | 315,000 | 412,000 | ||||||
| Amortization expense | 418,000 | 41,000 | ||||||
| Equity earnings in Sea Cliff | (336,600 | ) | 0 | |||||
| Net income | $ | (1,055,200 | ) | $ | (976,600 | ) | ||
| Statement of Retained Earnings | ||||||||
| Retained earnings 1/1 | $ | (7,550,000 | ) | $ | (3,331,200 | ) | ||
| Net income (above) | (1,055,200 | ) | (976,600 | ) | ||||
| Dividends declared | 600,000 | 150,000 | ||||||
| Retained earnings 12/31 | $ | (8,005,200 | ) | $ | (4,157,800 | ) | ||
| Balance Sheet | ||||||||
| Current assets | $ | 562,000 | $ | 415,000 | ||||
| Investment in Sea Cliff | 9,057,800 | 0 | ||||||
| Computer software | 380,000 | 69,000 | ||||||
| Patented technology | 896,000 | 112,000 | ||||||
| Goodwill | 132,000 | 0 | ||||||
| Equipment | 1,891,000 | 4,660,000 | ||||||
| Total assets | $ | 12,918,800 | $ | 5,256,000 | ||||
| Liabilities | $ | (2,913,600 | ) | $ | (298,200 | ) | ||
| Common stock | (2,000,000 | ) | (800,000 | ) | ||||
| Retained earnings 12/31 | (8,005,200 | ) | (4,157,800 | ) | ||||
| Total liabilities and equity | $ | (12,918,800 | ) | $ | (5,256,000 | ) | ||
Note: Parentheses indicate a credit balance.
-
Determine the fair value in excess of book value for Persoff's acquisition date investment in Sea Cliff.
-
Determine Persoff's Equity earnings in Sea Cliff's balance for the year ended December 31, 2018.
-
Determine Persoff's December 31, 2018, Investment in Sea Cliff's balance.
-
Prepare a worksheet to determine the consolidated values to be reported on Persoff’s financial statements.
Homework Answers
Part A
|
Sea Cliff acquisition-date fair value |
8608000 |
||
|
Sea Cliff book value |
(2588000) |
||
|
Fair value in excess of book value |
6020000 |
||
|
Excess assigned to specific accounts based on fair value |
Remaining life |
Annual excess amortization |
|
|
Computer software |
3120000 (3204000-84000) |
12 |
260000 |
|
Patented technology |
2660000 (2840000-180000) |
7 |
380000 |
|
Goodwill |
240000 (6020000-3120000-2660000) |
indefinite |
0 |
|
Total |
7437500 |
640000 |
Fair value in excess of book value = $6020000
Part B
|
Net income 12/31/18 |
976600 |
|
Amortization-Patent Tech. |
(380000) |
|
Depreciation-Comp. Software |
(260000) |
|
Equity earnings in Sea Cliff |
$336600 |
Part C
|
Fair value at January 3, 2016 |
8608000 |
|
Post-acquisition earnings net of amortization |
899800 |
|
Sea Cliff dividends since acquisition (150000+150000+150000) |
(450000) |
|
Investment balance at 12/31/15 |
$9057800 |
|
2016 (901600-640000) |
261600 |
|
2017 (941600-640000) |
301600 |
|
2018 (976600-640000) |
336600 |
|
Total Post-acquisition earnings net of amortization |
$899800 |
Part D
|
Income Statement |
Persoff |
Sea Cliff |
Adjustments & Eliminations |
Consolidated |
|
|
Revenues |
(2880000) |
(2330000) |
(5210000) |
||
|
Cost of goods sold |
1428400 |
900400 |
2328800 |
||
|
Depreciation |
315000 |
412000 |
727000 |
||
|
Amortization |
418000 |
41000 |
640000 |
1099000 |
|
|
Equity earnings in Sea Cliff |
(336600) |
336600 |
0 |
||
|
Net income |
(1055200) |
(976600) |
(1055200) |
||
|
Statement of Retained Earnings |
|||||
|
Retained earnings 1/1 |
(7550000) |
(3331200) |
3331200 |
(7550000) |
|
|
Net income (above) |
(1055200) |
(976600) |
(1055200) |
||
|
Dividends declared |
600,000 |
150,000 |
150000 |
600000 |
|
|
Retained earnings 12/31 |
(8005200) |
(4157800) |
(8005200) |
||
|
Balance Sheet |
|||||
|
Current assets |
562000 |
415000 |
977000 |
||
|
Investment in Sea Cliff |
9057800 |
150000 |
9207800 |
0 |
|
|
Computer software |
380000 |
69000 |
2600000 |
260000 |
2789000 |
|
Patented technology |
896000 |
112000 |
1900000 |
380000 |
2528000 |
|
Goodwill |
132000 |
0 |
240000 |
372000 |
|
|
Equipment |
1891000 |
4660000 |
6551000 |
||
|
Total assets |
12918800 |
5256000 |
13217000 |
||
|
Liabilities |
(2913600) |
(298200) |
(3211800) |
||
|
Common stock |
(2,000,000) |
(800,000) |
800,000 |
(2000000) |
|
|
Retained earnings 12/31 |
(8005200) |
(4157800) |
(8005200) |
||
|
Total liabilities and equity |
(12918800) |
(5256000) |
9997800 |
9997800 |
(13217000) |
3120000-(260000*2) =2600000
2660000-(380000*2) = 1900000
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