Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $5,875,000 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 $2,000,000 including retained earnings of $1,500,000 At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary: Consideration transferred Mathias stockholders' equity Excess fair over book value to unpatented technology (8-year remaining 118) to patents (10-year remaining life) to increase long-term debt (undervalued, 5-year remaining life) Goodwill $5,875,000 2,000,000 $3,875,000 $80,000 2,500,000 (100,000) 3,200,000 $ 675,000 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: 2020 2021 Income $ 480,000 960,000 Dividends $ 25,000 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 Cost of goods sold Depreciation expense Amortization expense Interest expense Equity earnings in Mathias Net Income Statement of Retained Earnings Retained earnings 1/1 Net Income (above) Dividends declared $ (6,400,000) 4.500.000 875,000 430,000 55,000 (630,000) $ (1,170,000) $(3.200,000) 2,500,000 277.000 103,000 60.000 0 $ (960.000) $ (5,340,000) (1,170,000) 5(1,955,000) (960,000) 50.000

Answer 1

Solution

Part A :

Investment in Mathias:	$	$
Consideration transferred at Januray 1st, 2020		5875000
Allison’s equity in Mathias earnings (net of amortization):
2020 ($480,000 – $330,000)	150000
2021 ($960,000 – $330,000)	630000
Post-acquisition earnings net of amortization		780000
Mathias dividends since acquisition		-75000
Investment balance at 31st December 2021		6580000
Excess acquisition-date fair over book value amortizations:
Unpatented technology                                     ($800,000 ÷ 8 years)	100000
Patents                                                        ($2,500,000 ÷ 10 years)	250000
Long-term debt                                                 ($100,000 ÷ 5 years)	-20000
Annual excess fair over book value amortization	330000

Part B :

ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2021
			Consolidation Entries
	Allison	Mathias	Debit	Credit	consolidated
Income Statement
Revenues	-6400000	-3900000			-10300000
Cost of goods sold	4500000	2500000			7000000
Depreciation expenses	875000	277000			1152000
Amortization expenses	430000	103000	350000		883000
Interest expense	55000	60000		20000	95000
Equity earnings in Mathias	-630000	0	630000		0
Net income	-1170000	-960000			-1170000
Statement of Retained Earnings
Retained earnings 1st January	-5340000	-1955000	-1955000		-5340000
Net income (above)	-1170000	-960000			-1170000
Dividends declared	560000	50000		50000	560000
Retained earnings 31st December	-5950000	-2865000			-5950000
Balance Sheet
Cash	75000	143000			218000
Accounts receivable	950000	225000			1175000
Inventory	1700000	785000			2485000
Investment in Mathias	6580000		50000	6630000	0
Equipment (net)	3700000	2052000			5752000
Patents	95000	0	2250000	250000	2095000
Unpatented technology	2125000	1450000	700000	100000	4175000
Goodwill	425000	0	675000		1100000
Total assets	15650000	4655000			17000000
Accounts payable	-500000	-90000			-590000
Long-term debt	-1000000	-1200000	20000	80000	-2260000
Common stock	-8200000	-500000	500000		-8200000
Retained earnings 12/31	-5950000	-2865000			-5950000
Total liabilities and equity	-15650000	-4655000	7269125	7269125	-17000000