On January 3, 2016, Persoff Corporation acquired all of the outstanding voting stock of Sea Cliff, Inc. in exchange for $6,000,000 in cash. Persoff elected to exercise control over Sea Cliff as a wholly owned subsidiary with an independent accounting system. Both companies have December 31 fiscal year-ends. At the acquisition date, Sea Cliff’s stockholders’ equity was $2,500,000 including retained earnings of $1,700,000.
Persoff pursued the acquisition, in part, to utilize Sea Cliff’s technology and computer software. These items had fair values that differed from their values on Sea Cliff’s books as follows:
Asset |
Book Value |
Fair Value |
Remaining
Useful Life |
Patented technology |
$ |
140,000 |
$ |
2,240,000 |
7 years |
Computer software |
|
60,000 |
|
1,260,000 |
12 years |
|
Sea Cliff’s remaining identifiable assets and liabilities had acquisition-date book values that closely approximated fair values. Since acquisition, no assets have been impaired. During the next three years, Sea Cliff reported the following income and dividends:
|
Net Income |
Dividends |
2016 |
$ |
900,000 |
$ |
150,000 |
2017 |
|
940,000 |
|
150,000 |
2018 |
|
975,000 |
|
150,000 |
|
December 31, 2018, financial statements for each company appear below. Parentheses indicate credit balances. Dividends declared were paid in the same period.
|
Persoff |
|
Sea Cliff |
Income Statement
|
|
|
|
|
|
|
|
Revenues |
$ |
(2,720,000 |
) |
|
$ |
(2,250,000 |
) |
Cost of goods sold |
|
1,350,000 |
|
|
|
870,000 |
|
Depreciation expense |
|
275,000 |
|
|
|
380,000 |
|
Amortization expense |
|
370,000 |
|
|
|
25,000 |
|
Equity earnings in Sea Cliff |
|
(575,000 |
) |
|
|
0 |
|
Net income |
$ |
(1,300,000 |
) |
|
$ |
(975,000 |
) |
Statement of Retained Earnings
|
|
|
|
|
|
|
|
Retained earnings 1/1 |
$ |
(7,470,000 |
) |
|
$ |
(3,240,000 |
) |
Net income (above) |
|
(1,300,000 |
) |
|
|
(975,000 |
) |
Dividends declared |
|
600,000 |
|
|
|
150,000 |
|
Retained earnings 12/31 |
$ |
(8,170,000 |
) |
|
$ |
(4,065,000 |
) |
Balance Sheet
|
|
|
|
|
|
|
|
Current assets |
$ |
490,000 |
|
|
$ |
375,000 |
|
Investment in Sea Cliff |
|
7,165,000 |
|
|
|
0 |
|
Computer software |
|
300,000 |
|
|
|
45,000 |
|
Patented technology |
|
800,000 |
|
|
|
80,000 |
|
Goodwill |
|
100,000 |
|
|
|
0 |
|
Equipment |
|
1,835,000 |
|
|
|
4,500,000 |
|
Total assets |
$ |
10,690,000 |
|
|
$ |
5,000,000 |
|
Liabilities |
$ |
(520,000 |
) |
|
$ |
(135,000 |
) |
|
Common stock |
|
(2,000,000 |
) |
|
|
(800,000 |
) |
Retained earnings 12/31 |
|
(8,170,000 |
) |
|
|
(4,065,000 |
) |
Total liabilities and equity |
$ |
(10,690,000 |
) |
|
$ |
(5,000,000 |
) |
|
Note: Parentheses indicate a credit balance.
Prepare a worksheet to determine the consolidated values to be reported on Persoff’s financial statements. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.)