On January 1, 2010, Pierson Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of Steele Company. The consideration transferred by Pierson provided a reasonable basis for assessing the total January 1, 2010, fair value of Steele Company. At the acquisition date, Steele reported the following owner’s equity amounts in its balance sheet:
Common stock | $400,000 |
Additional paid-in capital | 60,000 |
Retained earnings | 265,000 |
In determining its acquisition offer, Pierson noted that the values for Steele’s recorded assets and liabilities approximated their fair values. Pierson also observed that Steele had developed internally a customer base with an assessed fair value of $800,000 that was not reflected on Steele’s books. Pierson expected both cost and revenue synergies from the combination.
At the acquisition date, Pierson prepared the following fair-value allocation schedule:
Fair value of Steele Company | $1,900,000 |
Book value of Steele Company | 725,000 |
Excess fair value | 1,175,000 |
to customer base (10-year remaining life) | 800,000 |
to goodwill | $ 375,000 |
At December 31, 2011, the two companies report the following balances:
| Pierson | Steele |
Revenues | (1,843,000) | (675,000) |
Cost of goods sold | 1,100,000 | 322,000 |
Depreciation expense | 125,000 | 120,000 |
Amortization expense | 275,000 | 11,000 |
Interest expense | 27,500 | 7,000 |
Equity in income of Steele | (121,500) |
|
Net income | (437,000) | (215,000) |
Retained earnings, 1/1 | (2,625,000) | (395,000) |
Net income | (437,000) | (215,000) |
Dividends paid | 350,000 | 25,000 |
Retained earnings, 12/31 | (2,712,000) | (585,000) |
Current assets | 1,204,000 | 430,000 |
Investment in Steele | 1,854,000 |
|
Buildings and equipment | 931,000 | 863,000 |
Copyrights | 950,000 | 107,000 |
Total assets | 4,939,000 | 1,400,000 |
Accounts payable | (485,000) | (200,000) |
Notes payable | (542,000) | (155,000) |
Common stock | (900,000) | (400,000) |
Additional paid-in capital | (300,000) | (60,000) |
Retained earnings, 12/31 | (2,712,000) | (585,000) |
Total liabilities and equities | (4,939,000) | (1,400,000) |
a. Using the acquisition method, determine the consolidated balances for this business combination as of December 31, 2011.
b. If instead the noncontrolling interest’s acquisition-date fair value is assessed at $152,500, what changes would be evident in the consolidated statements?
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