Question

The following are selected account balances from Penske Company and Stanza Corporation as of December 31, 2021:

	Penske					Stanza
Revenues	$	(818,000)				$	(756,000)
Cost of goods sold		291,300					189,000
Depreciation expense		208,000					272,000
Investment income		Not given					0
Dividends declared		80,000					60,000
Retained earnings, 1/1/21		(750,000)					(360,000)
Current assets		414,000					588,000
Copyrights		1,060,000					550,500
Royalty agreements		662,000					1,138,000
Investment in Stanza		Not given					0
Liabilities		(502,000)					(1,401,500)
Common stock		(600,000)		($20 par)			(200,000)		($10 par)
Additional paid-in capital		(150,000)					(80,000)

Note: Parentheses indicate a credit balance.

On January 1, 2021, Penske acquired all of Stanza’s outstanding stock for $929,000 fair value in cash and common stock. Penske also paid $10,000 in stock issuance costs. At the date of acquisition, copyrights (with a six-year remaining life) have a $616,000 book value but a fair value of $706,000.

1. As of December 31, 2021, what is the consolidated copyrights balance?

2. For the year ending December 31, 2021, what is consolidated net income?

3. As of December 31, 2021, what is the consolidated retained earnings balance?

4. As of December 31, 2021, what is the consolidated balance to be reported for goodwill?

Answer 1

Answer:

1. As of December 31, 2021, what is the consolidated copyrights balance?

Consolidated Copyrights balance

1,685,500

2. For the year ending December 31, 2021, what is consolidated net income?

Consolidated Net income balance

598,700

3. As of December 31, 2021, what is the consolidated retained earnings balance?

Consolidated Retained earnings balance

1,268,700

4. As of December 31, 2021, what is the consolidated balance to be reported for goodwill?

Consolidated Goodwill balance

199,000

Calculation:

1.

Here we need to calculate the copyrights balance. For that we need to calculate the excess of fair value over the book value. And then the amortization for an year.

Fair value (a)	706,000
Less Book Value (b)	616,000
Excess over book value (c) = (a) - (b)	90,000
Amortization (c) / 6 years	15,000

After that we need to add the Penske Book Value and Stanza Book Value. Then need to add the Allocation of Copyright.

After that we need to deduct the amortization amount.

Penske Book Value	1,060,000
Stanza Book Value	550,500
Add Allocation of Copyright	90,000
Less: Excess Amortization	(15,000)
Consolidated Copyright Balance	1,685,500

2.

We need to calculate the consolidated net income. We need to deduct the Cost of goods sold from Revenues to calculate the gross profit.

Then we need to subtract the Depreciation expenses for parent and subsidiary. After that we need to deduct the Additional amortization of copyright from Stanza.

	Penske	Stanza	Consolidated
Revenues	818,000	756,000	1,574,000
Less: Cost of goods sold	(291,300)	(189,000)	(480,300)
Gross Profit	526,700	567,000	1,093,700
Less: Depreciation expenses	(208,000)	(272,000)	(480,000)
Less: Additional amortization of copyright		(15,000)	(15,000)
Net Income	318,700	280,000	598,700

3.

We need to calculate the consolidated retained earnings balance. We need to add the beginning retained balance of Penske with the Consolidated Net income calculated in question 2.

After that we need to deduct the Dividends Declared of Stanza.

Penske Reained earnings 1/1/21	750,000
Add: Consolidated Net income 2021	598,700
Less Dividends Declared	80,000
Consolidated Retained earnings 12/31/2021	1,268,700

4.

We need to calculate the consolidated balance to be reported for goodwill.

We need to deduct the Book value of subsidiary stockholder's equity balances from the Additional paid in capital provided in the question.

Then we will get the Fair value in excess of book value.

After that we need to deduct the Excess fair value allocated to copyrights on FV calculated in question 1. Then we will get the consolidated balance of goodwill.

Additional paid in capital	929,000
Book value of subsidiary stockholder's equity balances	(640,000)
Fair value in excess of book value	289,000
Excess fair value allocated to copyrights base on fair value	90,000
Goodwill	199,000