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 | ) | |
a-1. Complete the table to show the allocation of the fair value in excess of book value.
a-2. What balance will Allen show in its Subsidiary Earnings account?
b. Complete the worksheet by consolidating the financial information for these two companies.
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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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