Allison Corporation acquired all of the outstanding voting stock of Mathias, Incorporated, on January 1, 2023, in exchange for $6,059,500 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 $2,045,000 including retained earnings of $1,545,000.
Allison Corporation acquired all of the outstanding voting stock of Mathias, Incorporated, on January 1, 2023, in exchange for $6,059,500 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
At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:
| Consideration transferred | $ 6,059,500 | |
|---|---|---|
| Mathias stockholders' equity | 2,045,000 | |
| Excess fair over book value | $ 4,014,500 | |
| to unpatented technology (8-year remaining life) | $ 872,000 | |
| to patents (10-year remaining life) | 2,590,000 | |
| to increase long-term debt (undervalued, 5-year remaining life) | (145,000) | 3,317,000 |
| $ 697,500 |
Postacquisition, 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:
| Year | Income | Dividends |
|---|---|---|
| 2023 | $ 463,125 | $ 25,000 |
| 2024 | 926,250 | 50,000 |
No asset impairments have occurred since the acquisition date.
Individual financial statements for each company as of December 31, 2024, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.
| Items | Allison | Mathias |
|---|---|---|
| Income Statement | ||
| Sales | $ (6,580,000) | $ (3,945,000) |
| Cost of goods sold | 4,626,000 | 2,529,250 |
| 920,000 | 304,000 | |
| Amortization expense | 452,500 | 116,500 |
| Interest expense | 73,000 | 69,000 |
| Equity earnings in Mathias | (587,250) | 0 |
| Net income | $ (1,095,750) | $ (926,250) |
| Statement of Retained Earnings | ||
| Retained earnings, 1/1 | $ (5,430,000) | $ (1,983,125) |
| Net income (above) | (1,095,750) | (926,250) |
| Dividends declared | 560,000 | 50,000 |
| Retained earnings, 12/31 | $ (5,965,750) | $ (2,859,375) |
| Balance Sheet | ||
| Cash | $ 88,500 | $ 156,500 |
| Accounts receivable | 995,000 | 247,500 |
| Inventory | 1,790,000 | 830,000 |
| Investment in Mathias | 6,695,875 | 0 |
| Equipment (net) | 3,790,000 | 2,083,500 |
| Patents | 117,500 | 0 |
| Unpatented technology | 2,170,000 | 1,495,000 |
| Goodwill | 456,500 | 0 |
| Total assets | $ 16,103,375 | $ 4,812,500 |
| Accounts payable | $ (937,625) | $ (253,125) |
| Long-term debt | (1,000,000) | (1,200,000) |
| Common stock | (8,200,000) | (500,000) |
| Retained earnings, 12/31 | (5,965,750) | (2,859,375) |
| Total liabilities and equity | $ (16,103,375) | $ (4,812,500) |
Required:
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Determine the annual excess fair over book value amortization.
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Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.
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