Question

On January 1, 2020, Prestige Corporation acquired 100 percent of the voting stock of Stylene Corporation in exchange for $2,361,000 in cash and securities. On the acquisition date, Stylene had the following balance sheet:

  

Cash	$	30,600	Accounts payable	$	1,556,600
Accounts receivable		103,000
Inventory		197,000
Equipment (net)		2,070,000	Common stock		800,000
Trademarks		886,000	Retained earnings		930,000
Total assets	$	3,286,600	Total liabilities and equity	$	3,286,600

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	$	2,070,000	$	2,220,000	8 years
Customer lists		0		248,000	4 years
Trademarks		886,000		938,000	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
2020	$	228,000	$	25,000
2021		366,000		45,000

Dividends are declared and paid in the same period. The December 31, 2021, separate financial statements for each company follow. Parentheses indicate credit balances.

	Prestige				Stylene
Income Statement
Revenues	$	(4,500,000	)		$	(2,550,000	)
Cost of goods sold		2,450,000				1,800,000
Depreciation expense		551,000				384,000
Amortization expense		202,000				0
Equity earnings in Stylene		(285,250	)			0
Net income	$	(1,582,250	)		$	(366,000	)
Statement of Retained Earnings
Retained earnings 1/1	$	(3,460,000	)		$	(1,133,000	)
Net income (above)		(1,582,250	)			(366,000	)
Dividends declared		150,000				45,000
Retained earnings 12/31	$	(4,892,250	)		$	(1,454,000	)
Balance Sheet
Cash	$	512,000			$	65,000
Accounts receivable		806,000				84,500
Inventory		938,000				492,000
Investment in Stylene		2,723,500				0
Equipment		6,860,000				1,650,000
Customer lists		197,000				0
Trademarks		2,930,000				946,000
Goodwill		205,000				0
Total assets	$	15,171,500			$	3,237,500
Accounts payable	$	(1,779,250	)		$	(983,500	)
Common stock		(8,500,000	)			(800,000	)
Retained earnings, 12/31		(4,892,250	)			(1,454,000	)
Total liabilities and equity	$	(15,171,500	)		$	(3,237,500	)

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

2. Determine Prestige's December 31, 2021, Investment in Stylene balance.

3. Prepare a worksheet to determine the balances for Prestige’s December 31, 2021, consolidated financial statements.

Answer 1

a) Allocation Schedule Excess Value of Assests and Liabilities acquired at the time of acquisition Difference of Fair value over Book Value Fair Value book Value Equipment $ 2,070,000 $ 2,220,000 $ 150,000 Customer List 248,000 248,000 Trademark 886,000 938,000 52,000 Total 2,956,000 $ 3,406,000 $ 450,000 2,361,000 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 800,000 930,000 (1,730,000) 631,000 Life in years Equipment Customer List Trademark Goodwill (631,000 - 450,000) Total Value Assigned (A) (B) 150,000 248,000 52,000 181,000 631,000 Depreciation/Amortization per Value as on year (C= A/B) 01/01/21 [A-C] 8 18,750 131,250 4 62,000 186,000 52,000 181,000 80,750 550,250 Excess of Fair value over book value $ 631,000

b) Investment in Stylene Fair value at 1/1/20 Post acquisition earnings less excess amortization Stylene dividends since acquisition (25,000 + 45,000) Investment in Stylene 2,361,000 432,500 (70,000) 2,723,500 Working Notes: Post acquisistion earnings less excess amortization Net Income 2020 2021 Less: Amortization 2020 228,000 366,000 2021 (80,750) (80,750) 432,500 Post acquisistion earnings less excess amortization

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, 2021 Adjustment Entries Prestige Stylene Debit Credit (4,500,000) (2,550,000) 2,450,000 1,800,000 551,000 384,000 [E] 18,750 202,000 [E] 62,000 (285,250) [1] 285,250 (1,582,250) (366,000) Consolidated Totals (7,050,000) 4,250,000 953,750 264,000 (1,582,250) 1,133,000 Statement of Retained Earnings Retained Earnings 1/1 Net Income Dividend Declared Retained Earnings 12/31 (3,460,000) (1,582,250) 150,000 (4,892,250) (1,133,000) [S] (366,000) 45,000 (1,454,000) (3,460,000) (1,582,250) 150,000 (4,892,250) 45,000 [D]

65,000 84,500 492,000 577,000 890,500 1,430,000 Cash Accounts receivable Inventory Investment in Stylene Equipment Customer List Trademark Goodwill [D] 512,000 806,000 938,000 2,723,500 6,860,000 197,000 2,930,000 205,000 15,171,500 45,000 131,250 186,000 52,000 181,000 2,768,500 [1 + S +A ] 18,750 [E] 62,000 [E] 1,650,000 [A] [A] 946,000 [A] [A] 3,237,500 8,622,500 321,000 3,928,000 386,000 16,155,000 Total Assets (983,500) (1,779,250) (8,500,000) (2,762,750) (8,500,000) Accounts payable Common Stock - Prestige Common Stock - Stylene Retained Earnings 12/31 Total Liabilities and Equity 800,000 (4,892,250) (15,171,500) (800,000) [S] (1,454,000) (3,237,500) (4,892,250) (16,155,000) 2,894,250 2,894,250 Entries Explanation [O] 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 01/01/21 [E] is to record the amortization expenses of Customer List and Depreciation of Equipment during 2021 [D] is to eliminate the intercompany dividend

.