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(solution) Peterson Corporation exchanged $1,090,000 fair-value consideration


On January 1, 2013, Peterson Corporation exchanged $1,090,000 fair-value consideration for all of the outstanding voting stock of Santiago, Inc. At the acquisition date, Santiago had a book value equal to $950,000. Santiago’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was under- valued by $240,000 with an estimated remaining life of six years. The Santiago acquisition was Peterson’s only business combination for the year.In case expected synergies did not materialize, Peterson Corporation wished to prepare for a potential future spin-off of Santiago, Inc. Therefore, Peterson had Santiago maintain its separate incorporation and independent accounting information system as elements of continuing value.On December 31, 2013, each company submitted the following financial statements for consolidation.PetersonCorp.Santiago,Inc.IncomeStatementRevenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (535,000)$ (495,000)Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .170,000155,000Gain on bargain purchase. . . . . . . . . . . . . . . . . . . . . .(100,000)–0–Depreciation and amortization . . . . . . . . . . . . . . . . . .125,000140,000Equity earnings from Santiago . . . . . . . . . . . . . . . . . .(160,000)–0–Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (500,000)$ (200,000)StatementofRetainedEarningsRetained earnings, 1/1 . . . . . . . . . . . . . . . . . . . . . . . .$(1,500,000)$ (650,000)Net income (above) . . . . . . . . . . . . . . . . . . . . . . . . . .(500,000)(200,000)Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200,00050,000Retained earnings, 12/31 . . . . . . . . . . . . . . . . . . . . . .$(1,800,000)$ (800,000)BalanceSheetCurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 190,000$ 300,000Investment in Santiago . . . . . . . . . . . . . . . . . . . . . . .1,300,000–0–Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000200,000Patented technology. . . . . . . . . . . . . . . . . . . . . . . . . .300,000400,000Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .610,000300,000Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,500,000$ 1,200,000Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (165,000)$ (100,000)Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(535,000)(300,000)Retained earnings, 12/31 . . . . . . . . . . . . . . . . . . . . . .(1,800,000)(800,000)Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . .$(2,500,000)$(1,200,000)LO4a, LO4ba.Show how Peterson determined the following account balances• Gain on bargain purchase• Earnings from Santiago• Investment in Santiagob.Prepare a December 31, 2013, consolidated worksheet for Peterson and Santiago.

 


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