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: $6,121,000 2,060,000 $4,061,000 Consideration transferred Mathias stockholders' equity Excess fair over book value to unpatented technology (8-year remaining life) to patents (10-year remaining life) to increase long-term debt (undervalued, 5-year remaining life) Goodwill $ 896,000 2,620,000 (160,000) 3,356,000 $ 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: 2020 2021 Income $ 457,500 915,000 Dividends $ 25,000 50,000 No asset impairments have occurred since the acquisition date.

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)