Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at that time. Some of Lilly’s assets had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 96,000 $ 256,000 Customer relationships (5-year life) 0 120,000 Equipment (10-year life) 547,200 499,200 Rose computed income from Lilly using the Equity Method. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. Credit balances are indicated by parentheses. Rose Lilly Revenues $ (1,800,000) $ (832,000) Cost of goods sold 480,000 364,800 Depreciation expense 120,000 112,000 Amortization expense 40,000 0 Income from Lilly (336,000) 0 Net income $ (1,496,000) $ (355,200) Retained earnings 1/1 $ (1,120,000) $ (400,000) Net income (1,496,000) (355,200) Dividends paid 227,200 128,000 Retained earnings 12/31 $ (2,388,800) $ (627,200) Cash $ 296,000 $ 168,000 Receivables 360,000 89,600 Inventory 280,000 216,000 Investment in Lilly 1,088,000 0 Trademarks 758,400 96,000 Customer relationships 0 0 Equipment (net) 1,480,000 435,200 Goodwill 0 0 Total assets $ 4,262,400 $ 1,004,800 Liabilities $ (1,233,600) $ (217,600) Common stock (640,000) (160,000) Retained earnings 12/31 (2,388,800) (627,200) Total liabilities and equity $ (4,262,400) $ (1,004,800) Determine the amount of Amortization Expense to be reported for this business combination for the year ending December 31. Determine the amount of Depreciation Expense to be reported for this business combination for the year ending December 31. Determine the amount of Income from Lilly to be reported for this business combination for the year ending December 31. Determine the amount of Dividends Paid to be reported for this business combination for the year ending December 31. Determine the amount of Reatained Earnings to be reported for this business combination at December 31. Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at that time. Some of Lilly’s assets had fair values that differed from book values as follows: Solution (a) Amortization Total amortization expense for the business combination = Amortization of Rose + Amortization expense of Lilly (Book value) + Amortization expense of Lilly for Fair value adjustment. Fair value adjustments: a. Customer relationship = $120,000 / 5 = $24,000 So, Amortization Expense = $40,000 + 0 + $24,000 = $64,000 (2) Depreciation Total Depreciation expense for the business combination = Depreciation of Rose + Depreciation expense of Lilly (Book value) + Depreciation expense of Lilly for Fair value adjustment. Fair value adjustments: a. Equipment = $(499,200 - 547,200) / 10 = - $4,800 So, Depreciation Expense = $12.

1. Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on
January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at
that time. Some of Lilly’s assets had fair values that differed from book values as follows:
Book
Values
Fair
Values
Trademarks (indefinite life)
$
96,000
$
256,000
Customer relationships (5-year life)
0
120,000
Equipment (10-year life)
547,200
499,200
Rose computed income from Lilly using the Equity Method.
Following are financial statements at the end of the first year for these two companies
prepared from their separately maintained accounting systems. Credit balances are indicated by
parentheses.
Rose
Lilly
Revenues
$
(1,800,000)
$
(832,000)
Cost of goods sold
480,000
364,800
Depreciation expense

2. 120,000
112,000
Amortization expense
40,000
0
Income from Lilly
(336,000)
0
Net income
$
(1,496,000)
$
(355,200)
Retained earnings 1/1
$
(1,120,000)
$
(400,000)
Net income
(1,496,000)
(355,200)
Dividends paid
227,200
128,000
Retained earnings 12/31
$
(2,388,800)
$
(627,200)
Cash
$
296,000

3. $
168,000
Receivables
360,000
89,600
Inventory
280,000
216,000
Investment in Lilly
1,088,000
0
Trademarks
758,400
96,000
Customer relationships
0
0
Equipment (net)
1,480,000
435,200
Goodwill
0
0
Total assets
$
4,262,400
$
1,004,800
Liabilities
$
(1,233,600)
$
(217,600)
Common stock

4. (640,000)
(160,000)
Retained earnings 12/31
(2,388,800)
(627,200)
Total liabilities and equity
$
(4,262,400)
$
(1,004,800)
Determine the amount of Amortization Expense to be reported for this business combination for
the year ending December 31.
Determine the amount of Depreciation Expense to be reported for this business combination for
the year ending December 31.
Determine the amount of Income from Lilly to be reported for this business combination for the
year ending December 31.
Determine the amount of Dividends Paid to be reported for this business combination for the
year ending December 31.
Determine the amount of Reatained Earnings to be reported for this business combination at
December 31.
Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on
January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at
that time. Some of Lilly’s assets had fair values that differed from book values as follows:
Solution
(a) Amortization
Total amortization expense for the business combination
= Amortization of Rose + Amortization expense of Lilly (Book value) + Amortization expense
of Lilly for Fair value adjustment.
Fair value adjustments:
a. Customer relationship = $120,000 / 5 = $24,000
So, Amortization Expense = $40,000 + 0 + $24,000 = $64,000
(2) Depreciation

5. Total Depreciation expense for the business combination
= Depreciation of Rose + Depreciation expense of Lilly (Book value) + Depreciation expense of
Lilly for Fair value adjustment.
Fair value adjustments:
a. Equipment = $(499,200 - 547,200) / 10 = - $4,800
So, Depreciation Expense = $120,000 + $112,000 - $4,800 = $227,200
(3)
Adjusted Income from Lilly = Reported Income from Lilly + Fair value adjustments of
Amortization and Depreciation
= $336,000 - $64,000 + $4,800
= $276,800
(4)
Dividend Paid = $227,200 + $128,000 = $355,200
(5)
Ending Retained earnings = Total Beginning retained earnings + Total net income - Total
dividend paid
= $(1,120,000 + 400,000) + $(1,496,000 + 276,800) - $355,200
= $2,937,600