Problem - On January 1, 2013, Peterson Corporation exchanged $1,177,000 fair-value consideration for all of the outstanding voting stock of Santiago, Inc. At the acquisition date, Santiago had a book value equal to $1,100,000. Santiago's individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $252,000 with an estimated remaining life of six years. The Santiago acquisition was Peterson's only business combination for the year.
In case expected synergies did not materialize, Peterson Corporation wished to prepare for a potential future spin-off of Santiago, Inc. Therefore, Peterson had Santiago maintain its separate incorporation and independent accounting information system as elements of continuing value.
On December 31, 2013, each company submitted the following financial statements for consolidation.
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On December 31, 2013, each company submitted the following financial statements for consolidation.
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Peterson Corp.
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Santiago, Inc.
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Income Statement
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Revenues
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$(658,000)
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$(618,000)
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Cost of goods sold
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225,000
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242,000
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Gain on bargain purchase
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(175,000)
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0
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Depreciation and amortization
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149,000
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158,000
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Equity earnings from Santiago
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(176,000)
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0
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Net income
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$(635,000)
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$(218,000)
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Statement of Retained Earnings
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Retained earnings, 1/1
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$(1,825,000)
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(800,000)
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Net income (above)
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(635,000)
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(218,000)
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Dividends paid
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250,000
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30,000
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Retained earnings, 12/31
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$(2,210,000)
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(988,000)
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Balance Sheet
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Current assets
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$220,000
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$394,000
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Investment in Santiago
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1,498,000
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0
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Trademarks
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170,000
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254,000
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Patented technology
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376,000
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447,000
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Equipment
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668,000
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320,000
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Total assets
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$2,932,000
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$1,415,000
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Liabilities
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$(187,000)
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$(127,000)
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Common stock
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(535,000)
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(300,000)
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Retained earnings, 12/31
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(2,210,000)
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(988,000)
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Total liabilities and equity
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$(2,932,000)
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$(1,415,000
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Note: Parentheses indicate a credit balance.
a. How Peterson determined the following account balances.
Gain on bargain purchase
Earnings from Santiago
Investment in Santiago
b. Prepare a December 31, 2013, consolidated worksheet for Peterson and Santiago.