Reference no: EM132937946

On January 1, Year 3, First Rate Corp (First) purchased 1,350 common shares of Second Opinion Ltd (Second) for $112,500. On this date, the shareholders' equity accounts of Second were as follows:

Common (ordinary) shares (1,685 shares issued and outstanding) $35,000
Preferred shares (5,500 shares issued and outstanding) $71,500
Retained earnings $80,000

The preferred shares have a $1/share dividend rate and are cumulative and non-participating with a liquidation value of $13.80 per share. The dividends were one year in arrears on January 1, Year 3.

The following information pertains to retained earnings for the two companies for Year 3:

                                                                               First                 Second
Retained earnings, beginning of the year           $146,000       $80,000
Net income                                                   58,000           36,000
Dividends declared and paid                              20,000           18,000
Retained earnings, end of the year                   184,000               98,000

Additional information:

• First uses the cost method to account for its investment in Second
• Any acquisition differential related to patents with an estimated useful life of 5 years as of January 1, Year 3. Neither company has any patents recorded on their separate entity records.

Required:

Problem a. Prepare a schedule to analyze the purchase and to determine the fair value differential for the patent.