Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,121,000 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s stockholders’ equity was $2,060,000 including retained earnings of $1,560,000.

At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:

Consideration transferred					$	6,121,000
Mathias stockholders' equity						2,060,000
Excess fair over book value					$	4,061,000
to unpatented technology (8-year remaining life)	$	896,000
to patents (10-year remaining life)		2,620,000
to increase long-term debt (undervalued, 5-year remaining life)		(160,000	)			3,356,000
Goodwill					$	705,000

Postacquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends:

	Income		Dividends
2020	$	457,500	$	25,000
2021		915,000		50,000

No asset impairments have occurred since the acquisition date.

Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.

	Allison				Mathias
Income Statement
Sales	$	(6,640,000	)		$	(3,960,000	)
Cost of goods sold		4,668,000				2,539,000
Depreciation expense		935,000				313,000
Amortization expense		460,000				121,000
Interest expense		79,000				72,000
Equity earnings in Mathias		(573,000	)			0
Net income	$	(1,071,000	)		$	(915,000	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,460,000	)		$	(1,992,500	)
Net income (above)		(1,071,000	)			(915,000	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,971,000	)		$	(2,857,500	)
Balance Sheet
Cash	$	93,000			$	161,000
Accounts receivable		1,010,000				255,000
Inventory		1,820,000				845,000
Investment in Mathias		6,734,500				0
Equipment (net)		3,820,000				2,094,000
Patents		125,000				0
Unpatented technology		2,185,000				1,510,000
Goodwill		467,000				0
Total assets	$	16,254,500			$	4,865,000
Accounts payable	$	(1,083,500	)		$	(307,500	)
Long-term debt		(1,000,000	)			(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,971,000	)			(2,857,500	)
Total liabilities and equity	$	(16,254,500	)		$	(4,865,000	)

Required:

1. Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias.

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

Answer 1

Part A

Investment in Mathias:
Consideration transferred at 1/1/20		6121000
Allison’s equity in Mathias earnings (net of amortization):
2017 ($457500 – $342,000)	115500
2018 ($915000 – $342,000)	573000
Post-acquisition earnings net of amortization		688500
Mathias dividends since acquisition		(75000)
Investment balance at 12/31/18		$6734500

Excess acquisition-date fair over book value amortizations:
Unpatented technology ($896,000 ÷ 8 years)	112000
Patents ($2,620,000 ÷ 10 years)	262000
Long-term debt ($160000 ÷ 5 years)	(32000)
Annual excess fair over book value amortization	$342000

PART (B)

ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY

Consolidation Worksheet

For Year Ending December 31, 2018

	Allison	Mathias	Debit	Credit	consolidated
Income Statement
Revenues	(6640000)	(3960000)			-10600000
Cost of goods sold	4668000	2539000			7207000
Depreciation expenses	935000	313000			1248000
Amortization expenses	460000	121000	374000		955000
Interest expense	79000	72000		32000	119000
Equity earnings in Mathias	(573000)	0	573000		0
Net income	(1071000)	(915000)			-1986000
Statement of Retained Earnings					0
Retained earnings 1/1	(5460000)	(1992500)	1992500		-5460000
Net income (above)	(1071000)	(915000)			-1986000
Dividends declared	560000	50000		50000	560000
Retained earnings 12/31	(5971000)	(2857500)			-8828500
Balance Sheet
Cash	93000	161000			254000
Accounts receivable	1010000	255000			1265000
Inventory	1820000	845000			2665000
Investment in Mathias	6734500		50000	6784500	0
Equipment (net)	3820000	2094000			5914000
Patents	125000	0	2358000	262000	2221000
Unpatented technology	2185000	1510000	784000	112000	4367000
Goodwill	467000	0	705000		1172000
Total assets	16254500	4865000			21119500
Accounts payable	(1083500)	(307500)			-1391000
Long-term debt	(1000000)	(1200000)	32000	128000	-2296000
Common stock	(8200000)	(500000)	500000		-8200000
Retained earnings 12/31	(5971000)	(2857500)			-8828500
Total liabilities and equity	(2170500)	(2680000)	7368500	7368500	(18262000)