On January 1, 2012, Pierson Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of Steele Company. The consideration transferred by Pierson provided a reasonable basis for assessing the total January 1, 2012, fair value of Steele Company. At the acquisition date, Steele reported the following owners' equity amounts in its balance sheet:
- Common stock $400,000
- Additional paid-in capital 60,000
- Retained earnings 265,000
In determining its acquisition offer, Pierson noted that the values for Steele's recorded assets and liabilities approximated their fair values. Pierson also observed that Steele had developed internally a customer base with an assessed fair value of $800,000 that was not reflected on Steele's books. Pierson expected both cost and revenue synergies from the combination.
At the acquisition date, Pierson prepared the following fair-value allocation schedule:
- Fair value of Steele Company $ 1,900,000
- Book value of Steele Company 725,000
- Excess fair value 1,175,000
- to customer base (10-year remaining life) 800,000
- to goodwill $ 375,000
At December 31, 2013, the two companies report the following balances:
Pierson Steele
- Revenues $ (1,843,000) $ (675,000)
- Cost of goods sold 1,100,000 322,000
- Depreciation expense 125,000 120,000
- Amortization expense 275,000 11,000
- Interest expense 27,500 7,000
- Equity in income of Steele (121,500) 0
- Net income $ (437,000) $ (215,000)
- Retained earnings, 1/1 $ (2,625,000) $ (395,000)
- Net income (437,000) (215,000)
- Dividends paid 350,000 25,000
- Retained earnings, 12/31 $ (2,712,000) $ (585,000)
- Current assets $ 1,204,000 $ 430,000
- Investment in Steele 1,854,000 0
- Buildings and equipment 931,000 863,000
- Copyrights 950,000 107,000
- Total assets $ 4,939,000 $ 1,400,000
- Accounts payable $ (485,000) $ (200,000)
- Notes payable (542,000) (155,000)
- Common stock (900,000) (400,000)
- Additional paid-in capital (300,000) (60,000)
- Retained earnings, 12/31 (2,712,000) (585,000)
- Total liabilities and equities $ (4,939,000) $ (1,400,000)
- Note: Parentheses indicate a credit balance.
b. If instead the noncontrolling interest's acquisition-date fair value is assessed at $152,500, what changes would be evident in the consolidated statements? Both goodwill and noncontrolling interest will by .