Question

Allen Company acquired 100 percent of Bradford Company’s voting stock on January 1, 2014, by issuing...

Allen Company acquired 100 percent of Bradford Company’s voting stock on January 1, 2014, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $26.5 per share). As of that date, Bradford had stockholders’ equity totaling $211,250. Land shown on Bradford’s accounting records was undervalued by $12,200. Equipment (with a five-year remaining life) was undervalued by $5,350. A secret formula developed by Bradford was appraised at $36,200 with an estimated life of 20 years.

Following are the separate financial statements for the two companies for the year ending December 31, 2018. There were no intra-entity payables on that date. Credit balances are indicated by parentheses.

Allen
Company		 Bradford
Company
Revenues $ (524,000 ) $ (283,750 )
Cost of goods sold 173,000 107,500
Depreciation expense 177,750 77,700
Subsidiary earnings (95,670 ) 0
Net income $ (268,920 ) $ (98,550 )
Retained earnings, 1/1/18 $ (776,000 ) $ (124,500 )
Net income (above) (268,920 ) (98,550 )
Dividends declared 175,500 40,000
Retained earnings ,12/31/18 $ (869,420 ) $ (183,050 )
Current assets $ 352,000 $ 103,000
Investment in Bradford 287,400 0
Company
Land 536,000 60,000
Buildings and equipment (net) 752,000 235,000
Total assets $ 1,927,400 $ 398,000
Current liabilities $ (367,980 ) $ (149,950 )
Common stock (600,000 ) (60,000 )
Additional paid-in capital (90,000 ) (5,000 )
Retained earnings, 12/31/18 (869,420 ) (183,050 )
Total liabilities and equity $ (1,927,400 ) $ (398,000 )

  1. a-1. Complete the table to show the allocation of the fair value in excess of book value.

  2. a-2. What balance will Allen show in its Subsidiary Earnings account?

  3. b. Complete the worksheet by consolidating the financial information for these two companies.

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Answer #1
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Part a1
Bradford's acquisition Date Fair value 10,000*$26.5 $           265,000
Less: Book Value of Bradford's net asset $         -211,250
Excess of Fair Value $             53,750
Allocation: Life Amortization 4 year Amortization Balance
Land $             12,200 $                   -  
Equipment $                5,350 5 Year $            1,070 $                        4,280 $             1,070
Secret Formula $             36,200 20 year $            1,810 $                        7,240 $           28,960
$             53,750 $            2,880
Part a2 Equity Method
Share of Net income of Bradford's $           98,550
Less: Amortization $           -2,880
Subsidiary Earning for Allen $           95,670
Part b
Allen Bradford Debit Credit Consolidated
Income Statement
Revenues $       -524,000 $         -283,750 $       -807,750
Cost of goods sold $        173,000 $           107,500 $        280,500
Depreciation expense $        177,750 $             77,700 E $            1,070 $        256,520
Amortization expense $                    -   $                       -   E $            1,810 $             1,810
Equity in subsidiary earnings $         -95,670 $                       -   I $         95,670 $                    -  
Net income $       -268,920 $            -98,550 $         98,550 $       -268,920
Statement of Retained Earnings
Retained earnings 1/1 $       -776,000 $         -124,500 S $       124,500 $       -776,000
Net income (above) $       -268,920 $            -98,550 $       -268,920
Dividends declared $        175,500 $             40,000 D $                      40,000 $        175,500
Retained earnings 12/31 $       -869,420 $         -183,050 $       -869,420
Balance Sheet
Current assets $        352,000 $           103,000 $        455,000
Investment in Bradford Co. $        287,400 $                       -   D $         40,000 S $                   189,500 $                    -  
A $                      42,230
I $                      95,670
Land $        536,000 $             60,000 A $         12,200 $        608,200
Buildings and equipment (net) $        752,000 $           235,000 A $            1,070 E $                        1,070 $        987,000
Formula $                    -   $                       -   A $         28,960 E $                        1,810 $           27,150
Total assets $     1,927,400 $           398,000 $   294,000 $     2,077,350
Current liabilities $       -367,980 $         -149,950 $       -517,930
Common stock $       -600,000 $            -60,000 S $         60,000 $       -600,000
Additional paid-in capital $         -90,000 $              -5,000 S $            5,000 $         -90,000
Retained earnings 12/31 $       -869,420 $         -183,050 $       -869,420
Total liabilities and equity $   -1,927,400 $         -398,000 $   -2,077,350
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