Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2017, in exchange for $5,895,500 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 $2,005,000 including retained earnings of $1,505,000.

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

Consideration transferred					$	5,895,500
Mathias stockholders' equity						2,005,000
Excess fair over book value					$	3,890,500
to unpatented technology (8-year remaining life)	$	808,000
to patents (10-year remaining life)		2,510,000
to increase long-term debt (undervalued, 5-year remaining life)		(105,000	)			3,213,000
Goodwill					$	677,500

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	$	478,125	$	25,000
2018		956,250		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	$	(6,420,000	)		$	(3,905,000	)
Cost of goods sold		4,514,000				2,503,250
Depreciation expense		880,000				280,000
Amortization expense		432,500				104,500
Interest expense		57,000				61,000
Equity earnings in Mathias		(625,250	)			0
Net income	$	(1,161,750	)		$	(956,250	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,350,000	)		$	(1,958,125	)
Net income (above)		(1,161,750	)			(956,250	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,951,750	)		$	(2,864,375	)
Balance Sheet
Cash	$	76,500			$	144,500
Accounts receivable		955,000				227,500
Inventory		1,710,000				790,000
Investment in Mathias		6,592,875				0
Equipment (net)		3,710,000				2,055,500
Patents		97,500				0
Unpatented technology		2,130,000				1,455,000
Goodwill		428,500				0
Total assets	$	15,700,375			$	4,672,500
Accounts payable	$	(548,625	)		$	(108,125	)
Long-term debt	$	(1,000,000	)		$	(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,951,750	)			(2,864,375	)
Total liabilities and equity	$	(15,700,375	)		$	(4,672,500	)

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

Part A
Investment in Mathias
Consideration transferred at 1/1/17		5895500
Allison’s equity in Mathias earnings (net of amortization):
2017 ($478125 – $331,000)	147125
2018 ($956250 – $331,000)	625250
Post-acquisition earnings net of amortization		772375
Mathias dividends since acquisition		75000
Investment balance at 12/31/18		$6,592,875
Excess acquisition-date fair over book value amortizations:
Unpatented technology ($808,000 ÷ 8 years)	101000
Patents ($2,510,000 ÷ 10 years)	251000
Long-term debt ($105,000 ÷ 5 years)	21000
Annual excess fair over book value amortization	$331,000

Part B
ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2018
			Consolidation Entries
	Allison	Mathias	Debit	Credit	consolidated
Income Statement
Revenues	6420000	3905000			10325000
Cost of goods sold	4514000	2503250			7017250
Depreciation expenses	880000	280000			1160000
Amortization expenses	432500	104500	352000		889000
Interest expense	57000	61000		21000	97000
Equity earnings in Mathias	625250	0	625250		0
Net income	1161750	956250			1161750
Statement of Retained Earnings
Retained earnings 1/1	5350000	1958125	1958125		5350000
Net income (above)	1161750	956250			1161750
Dividends declared	560000	50000		50000	560000
Retained earnings 12/31	5951750	2864375			5951750
Balance Sheet
Cash	76500	144500			221000
Accounts receivable	955000	227500			1182500
Inventory	1710000	790000			2500000
Investment in Mathias	6592875		50000	6642875	0
Equipment (net)	3710000	2055500			5765500
Patents	97500	0	2259000	251000	2105500
Unpatented technology	2130000	1455000	707000	101000	4191000
Goodwill	428500	0	677500		1106000
Total assets	15700375	4672500			17071500
Accounts payable	548625	108125			656750
Long-term debt	1000000	1200000	21000	84000	2263000
Common stock	8200000	500000	500000		8200000
Retained earnings 12/31	5951750	2864375			5951750
Total liabilities and equity	15700375	4672500	7149875	7149875	1707150