Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2017, in exchange for $6,100,500 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 $2,055,000 including retained earnings of $1,555,000.

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

Consideration transferred					$	6,100,500
Mathias stockholders' equity						2,055,000
Excess fair over book value					$	4,045,500
to unpatented technology (8-year remaining life)	$	888,000
to patents (10-year remaining life)		2,610,000
to increase long-term debt (undervalued, 5-year remaining life)		(155,000	)			3,343,000
Goodwill					$	702,500

Post-acquisition, 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
2017	$	459,375	$	25,000
2018		918,750		50,000

No asset impairments have occurred since the acquisition date.

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

	Allison				Mathias
Income Statement
Sales	$	(6,620,000	)		$	(3,955,000	)
Cost of goods sold		4,654,000				2,535,750
Depreciation expense		930,000				310,000
Amortization expense		457,500				119,500
Interest expense		77,000				71,000
Equity earnings in Mathias		(577,750	)			0
Net income	$	(1,079,250	)		$	(918,750	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,450,000	)		$	(1,989,375	)
Net income (above)		(1,079,250	)			(918,750	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,969,250	)		$	(2,858,125	)
Balance Sheet
Cash	$	91,500			$	159,500
Accounts receivable		1,005,000				252,500
Inventory		1,810,000				840,000
Investment in Mathias		6,721,625				0
Equipment (net)		3,810,000				2,090,500
Patents		122,500				0
Unpatented technology		2,180,000				1,505,000
Goodwill		463,500				0
Total assets	$	16,204,125			$	4,847,500
Accounts payable	$	(1,034,875	)		$	(289,375	)
Long-term debt	$	(1,000,000	)		$	(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,969,250	)			(2,858,125	)
Total liabilities and equity	$	(16,204,125	)		$	(4,847,500	)

Required:

1. Determine Allison's December 31, 2018, Investment in Mathias balance.

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

Answer 1

a	Calculation of Amortization in excess of fair value
	Unpatented technology -8 yr remaining life
		888000/8	$111,000
	Patents -10 yr remaining life
		2610000/10	$261,000
	Long term debt-5 yrs remaining life
		155000/5	($31,000)
			$341,000
	Determine Allison's December 31, 2018, Investment in Mathias balance.
	Particulars	Amount
	Investment on 1/1/2017	$6,100,500
	Add Income from M	$459,375
	Less Dividend Received	($25,000)
	Less Amortization of fair value in assets	($341,000)
	Investment on 1/1/2018	$6,193,875
	Add income from M 2018	$918,750
	Less Dividend Received	($50,000)
	Less Amortization of fair value in assets	($341,000)
		$6,721,625
b	Determination of the consolidated balances					Consolidation Entries			Consolidated Total
	Particulars		Allison	Mathias		Dr		Cr
	Sales		($6,620,000)	($3,955,000)					($10,575,000)
	Cost of goods sold		$4,654,000	$2,535,750					$7,189,750
	Depreciation Expense		$930,000	$310,000					$1,240,000
	Amortization Expense		$457,500	$119,500		$372,000		$31,000	$918,000
	Interest Expense		$77,000	$71,000					$148,000
	Equity in income of M		($577,750)	$0		$577,750			$0
	Net Income		($1,079,250)	($918,750)					($1,079,250)
	Retained Earnings 1/1		($5,450,000)	($1,989,375)		$1,989,375			($5,450,000)
	Net Income		($1,079,250)	($918,750)		$918,750			($1,079,250)
	Dividend declared		$560,000	$50,000				$50,000	$560,000
	Retained earnings12/31		($5,969,250)	($2,858,125)					($5,969,250)
	Cash		$91,500	$159,500					$251,000
	Accounts Receivable		$1,005,000	$252,500					$1,257,500
	Inventory		$1,810,000	$840,000					$2,650,000
	Investment in M		$6,721,625	$0				$6,721,625	$0
	Equipment		$3,810,000	$2,090,500					$5,900,500
	Patents		$122,500	$0		$2,610,000		$522,000	$2,210,500
	Unpatented Technology		$2,180,000	$1,505,000		$888,000		$222,000	$4,351,000
	Goodwill		$463,500	$0		$702,500			$1,166,000
	Total Assets		$16,204,125	$4,847,500					$17,786,500
	Accounts Payable		($1,034,875)	($289,375)					($1,324,250)
	Long Term Debt		($1,000,000)	($1,200,000)		$62,000		$155,000	($2,293,000)
	Common Stock		($8,200,000)	($500,000)		$500,000			($8,200,000)
	Retained Earnings-12/31		($5,969,250)	($2,858,125)					($5,969,250)
	Total Liabilities and Equity		($16,204,125)	($4,847,500)					($17,786,500)
	Note
	Patents are amortized for 2 years		111000 per yr
	Unpatented technology amortized for 2 years		261000 per yr
	Long term debt amortized for 2 yrs		31000 per yr

Answer 2

Part of your answer is wrong