Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,121,000 incash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. Atthe acquisition date, Mathiasâs stockholdersâ equity was $2,070,000including retained earnings of $1,570,000.
At the acquisition date, Allison prepared the following fairvalue allocation schedule for its newly acquired subsidiary:
| Consideration transferred | $ | 6,121,000 | |||||
| Mathias stockholders’equity | 2,070,000 | ||||||
| Excess fair over bookvalue | $ | 4,092,000 | |||||
| to unpatented technology(8-year remaining life) | $ | 912,000 | |||||
| to patents (10-year remaininglife) | 2,640,000 | ||||||
| to increase long-term debt(undervalued, 5-year remaining life) | (170,000 | ) | 3,382,000 | ||||
| Goodwill | $ | 710,000 | |||||
Post-acquisition, Allison employs the equity method to accountfor its investment in Mathias. During the two years following thebusiness combination, Mathias reports the following income anddividends:
| Income | Dividends | |||
| 2020 | $ | 453,750 | $ | 25,000 |
| 2021 | 907,500 | 50,000 | ||
No asset impairments have occurred since the acquisitiondate.
Individual financial statements for each company as of December31, 2021, appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period.
| Allison | Mathias | ||||||
| IncomeStatement | |||||||
| Sales | $ | (6,680,000 | ) | $ | (3,970,000 | ) | |
| Cost of goods sold | 4,696,000 | 2,545,500 | |||||
| Depreciation expense | 945,000 | 319,000 | |||||
| Amortization expense | 465,000 | 124,000 | |||||
| Interest expense | 83,000 | 74,000 | |||||
| Equity earnings in Mathias | (563,500 | ) | 0 | ||||
| Net income | $ | (1,054,500 | ) | $ | (907,500 | ) | |
| Statement of RetainedEarnings | |||||||
| Retained earnings 1/1 | $ | (5,480,000 | ) | $ | (1,998,750 | ) | |
| Net income (above) | (1,054,500 | ) | (907,500 | ) | |||
| Dividends declared | 560,000 | 50,000 | |||||
| Retained earnings 12/31 | $ | (5,974,500 | ) | $ | (2,856,250 | ) | |
| BalanceSheet | |||||||
| Cash | $ | 96,000 | $ | 164,000 | |||
| Accounts receivable | 1,020,000 | 260,000 | |||||
| Inventory | 1,840,000 | 855,000 | |||||
| Investment in Mathias | 6,760,250 | 0 | |||||
| Equipment (net) | 3,840,000 | 2,101,000 | |||||
| Patents | 130,000 | 0 | |||||
| Unpatented technology | 2,195,000 | 1,520,000 | |||||
| Goodwill | 474,000 | 0 | |||||
| Total assets | $ | 16,355,250 | $ | 4,900,000 | |||
| Accounts payable | $ | (1,180,750 | ) | $ | (343,750 | ) | |
| Long-term debt | $ | (1,000,000 | ) | $ | (1,200,000 | ) | |
| Common stock | (8,200,000 | ) | (500,000 | ) | |||
| Retained earnings 12/31 | (5,974,500 | ) | (2,856,250 | ) | |||
| Total liabilities andequity | $ | (16,355,250 | ) | $ | (4,900,000 | ) | |
Required:
Determine Allison’s December 31, 2021, Investment inMathias balance.
Prepare a worksheet to determine the consolidated valuesto be reported on Allisonâs financial statements.
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