Question

On January 1, 2017, Prestige Corporation acquired 100 percent of the voting stock of Stylene Corporation in exchange for $2,312,500 in cash and securities. On the acquisition date, Stylene had the following balance sheet:

  

Cash	$	28,600	Accounts payable	$	1,377,100
Accounts receivable		111,500
Inventory		141,000
Equipment (net)		1,830,000	Common stock		800,000
Trademarks		918,000	Retained earnings		852,000
	$	3,029,100		$	3,029,100

At the acquisition date, the book values of Stylene’s assets and liabilities were generally equivalent to their fair values except for the following assets:

Asset	Book Value		Fair Value		Remaining Useful Life
Equipment	$	1,830,000	$	2,006,000	8 years
Customer lists		0		208,000	4 years
Trademarks		918,000		1,014,500	indefinite

During the next two years, Stylene has the following income and dividends in its own separately prepared financial reports to its parent.

	Net Income		Dividends
2017	$	251,000	$	25,000
2018		532,000		45,000

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

	Prestige				Stylene
Income Statement
Revenues	$	(5,460,000	)		$	(3,096,000	)
Cost of goods sold		2,930,000				2,190,000
Depreciation expense		508,000				374,000
Amortization expense		127,000				0
Equity earnings in Stylene		(458,000	)			0
Net income	$	(2,353,000	)		$	(532,000	)
Statement of Retained Earnings
Retained earnings 1/1	$	(3,300,000	)		$	(1,078,000	)
Net income (above)		(2,353,000	)			(532,000	)
Dividends declared		150,000				45,000
Retained earnings 12/31	$	(5,503,000	)		$	(1,565,000	)
Balance Sheet
Cash	$	502,000			$	38,000
Accounts receivable		738,000				111,500
Inventory		937,000				486,000
Investment in Stylene		2,877,500				0
Equipment		6,930,000				1,732,500
Customer lists		157,000				0
Trademarks		3,390,000				984,000
Goodwill		215,000				0
Total assets	$	15,746,500			$	3,352,000
Accounts payable	$	(1,743,500	)		$	(987,000	)
Common stock		(8,500,000	)			(800,000	)
Retained earnings, 12/31		(5,503,000	)			(1,565,000	)
Total liabilities and equity	$	(15,746,500	)		$	(3,352,000	)

1. Determine the fair value in excess of book value for Prestige’s acquisition date investment in Stylene.

2. Determine Prestige's December 31, 2018, Investment in Stylene balance.

3. Prepare a worksheet to determine the balances for Peregrine’s December 31, 2018, consolidated financial statements.

Answer 1

a) Allocation Schedule Excess Value of Assests and Liabilities acquired at the time of acquisition Book Value Equipment Customer List Trademark Total Fair Value 1,830,000 $ 2,006,000 208,000 918,000 1,014,500 2,748,000 $ 3,228,500 Difference of Fair value over book Value 176,000 208,000 96,500 $ 480,500 $ 2,312,500 Allocation of Excess of Fair value over book Value Consideration transferred by Prestige Less: Book Value of Stylene Common stock Retained Earnings Excess of Fair value over book value Allocation of Excess value to Specified Assets 800,000 852,000 (1,652,000) 660,500 Life in years (B) Equipment Customer List Trademark Goodwill (660,500 - 480,500) Total Value Assigned (A) 176,000 208,000 96,500 180,000 660,500 Depreciation/Amortization per Value as on year (C= A/B) 01/01/18 [A-C] 22,000 154,000 52,000 156,000 96,500 180,000 74,000 586,500

b) Investment in Stylene Fair value at 1/1/17 Post acquisition earnings less excess amortization Stylene dividends since acquisition (25,000 + 45,000) Investment in Stylene 2,312,500 635,000 (70,000) 2,877,500 Working Notes: Post acquisistion earnings less excess amortization Net Income 2017 2018 Less: Amortization 2017 2018 Post acquisistion earnings less excess amortization 251,000 532,000 (74,000) (74,000) 635,000

Revenues Cost of goods sold Depreciation expense Amortization expense Equity Earnings in Stylene Net Income PRESTIGE AND ITS SUBSIDIARY STYLENE Consolidated Worksheet For the year ended December 31, 2018 Adjustment Entries Prestige Stylene Debit Credit (5,460,000) (3,096,000) 2,930,000 2,190,000 508,000 374,000 [E] 22,000 127,000 [E] 52,000 (458,000) 458,000 (2,353,000) (532,000) Consolidated Totals (8,556,000) 5,120,000 904,000 179,000 (2,353,000) 1,078,000 Statement of Retained Earnings Retained Earnings 1/1 Net Income Dividend Declared Retained Earnings 12/31 (3,300,000) (2,353,000) 150,000 (5,503,000) (1,078,000) [S] (532,000) 45,000 (1,565,000) (3,300,000) (2,353,000) 150,000 (5,503,000) 45,000 [D] 38,000 111,500 486,000 L L 540,000 849,500 1,423,000 Cash Accounts receivable Inventory Investment in Stylene Equipment Customer List Trademark Goodwill Total Assets 502,000 738,000 937,000 2,877,500 6,930,000 157,000 3,390,000 215,000 15,746,500 1,732,500 [D] (A) [A] [A] [A] 45,000 154,000 156,000 96,500 180,000 2,922,500 22,000 52,000 [1 + S +A) [E] [E] 984,000 - 3,352,000 8,794,500 261,000 4,470,500 395,000 16,733,500

(987,000) (1,743,500)| (8,500,000) (2,730,500) (8,500,000) Accounts payable Common Stock - Prestige Common Stock - Stylene Retained Earnings 12/31 Total Liabilities and Equity 800,000 (5,503,000) (15,746,500) (800,000) [S] (1,565,000) (3,352,000) (5,503,000) (16,733,500) 3,041,500 3,041,500 3,041,500 Entries Explanation [1] is to eliminate the equity income [S] is to eliminate the stockholders' equity of Stylene [A] is to record the unamortized value of excess fair value as on 01/01/18 [E] is to record the amortization expenses of Customer List and Depreciation of Equipment during 2018 [D] is to eliminate the intercompany dividend