Problem

On January 1,2013, Peterson Corporation exchanged $1,090,000 fair-value consideration for...

On January 1,2013, Peterson Corporation exchanged $1,090,000 fair-value consideration for all of the outstanding voting stock of Santiago, Inc. At the acquisition date, Santiago had a book value equal to $950,000. Santiago’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was under­valued by $240,000 with an estimated remaining life of six years. The Santiago acquisition was Peterson’s only business combination for the year.

In case expected synergies did not materialize, Peterson Corporation wished to prepare for a potential future spin-off of Santiago, Inc. Therefore, Peterson had Santiago maintain its separate incorporation and independent accounting information system as elements of continuing value.

On December 31, 2013, each company submitted the following financial statements for consolidation.

 

Peterson Corp.

Santiago, Inc.

Income Statement

 

 

Revenues

$(535,000)

$(495,000)

Cost of goods sold

170,000

155,000

Gain on bargain purchase

(100,000)

-0-

Depreciation and amortization

125,000

140,000

Equity earnings from Santiago

(160,000)

-0-

Net income

$(500,000)

$(200,000)

Statement of Retained Earnings

 

 

Retained earnings, 1/1

$(1,500,000)

$(650,000)

Net income (above)

(500,000)

(200,000)

Dividends paid

200,000

50,000

Retained earnings, 12/31

$(1,800,000)

$(800,000)

Balance Sheet

 

 

Current assets

$190,000

$300,000

Investment in Santiago

1,300000

-0-

Trademarks

100,000

200,000

Patented technology

300,000

400,000

Equipment

610,000

300,000

Total assets

$2,500,000

$1,200,000

Liabilities

$(165,000)

$(100,000)

Common stock

(535,000)

(300,000)

Retained earnings, 12/31

(1,800,000)

(800,000)

Total liabilities and equity

$(2,500,000)

$(1,200,000)

a. Show how Peterson determined the following account balances

• Gain on bargain purchase

• Earnings from Santiago

• Investment in Santiago

b. Prepare a December 31, 2013, consolidated worksheet for Peterson and Santiago.

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