Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2017, in exchange for $6,305,500 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 $2,105,000 including retained earnings of $1,605,000. At the acquisition date, Allison prepared the following fair value allocation schedule for its newly acquired subsidiary: Consideration transferred $6,305,500
Mathias stockholders' equity 2,105, 000
Excess fair over book value $4,200,500
to unpatented technology (8-year remaining life) $968,000
to patents (10-year remaining life) 2,710,000
to increase long-term debt (undervalued,
5-year remaining life) (205,000) 3.473.000
Goodwill $727,500
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 $440,625 25,000
2018 81,250 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
Cost of goods sold 4,542,000 2,509,750
Depreciation expense 890,000 286,000
Amortization expense 437,500 107,500
Interest expense 61,000 63,000
Equity earnings in Mathias (615,750) 615,750
Net income $(1,145,250) $(948,750)
Statement of Retained Earnings
Retained earnings 1/1 (5,370,000) (1,964,375)
Net income (above) (1,145,250) (948,750)
Dividends declared 560,000 50,000
Retained earnings 12/31 $(5,955,250) $(2,863,120)
Balance Sheet
Cash $79,500 $147,500
Accounts receivable 965,000 232,500
Inventories 1,730,000 800,000
Investment in Mathias 6,618,625 0
Equipment (net) 3,730,000 2,062,500
Patents 102,500 253,000
Unpatented technology 2,140,000 1,465,000
Goodwill 435,500 0
Total assets $15,801,125 $4,707,500
Accounts payable (645,875) (144,375)
Long-term debt (1,000,000) (1,200,000)
Common stock (8,200,000) (500,000)
Retained earnings 12/31 (5,955,250) (2,863,125)
Total liabilities and equity $(15,801,125) $(4,707,500)
$6,008,750 $406,000
Required:
A. Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias.
B. Prepare a worksheet to determine the consolidated values to be reported on Allison's financial statements.