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 RemainingUseful 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.)

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 RemainingUseful 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.)

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 25E

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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.)

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