Question

On January 1, 2017, Panther, Inc., issued securities with a total fair value of $588,000 for 100 percent of Stark Corporation's outstanding ownership shares. Stark has long supplied inventory to Panther. The companies expect to achieve synergies with production scheduling and product development with this combination.

Although Stark's book value at the acquisition date was $324,000, the fair value of its trademarks was assessed to be $62,000 more than their carrying amounts. Additionally, Stark's patented technology was undervalued in its accounting records by $202,000. The trademarks were considered to have indefinite lives, and the estimated remaining life of the patented technology was eight years.

In 2017, Stark sold Panther inventory costing $90,000 for $180,000. As of December 31, 2017, Panther had resold 69 percent of this inventory. In 2018, Panther bought from Stark $164,000 of inventory that had an original cost of $82,000. At the end of 2018, Panther held $44,300 (transfer price) of inventory acquired from Stark, all from its 2018 purchases.

During 2018, Panther sold Stark a parcel of land for $103,000 and recorded a gain of $18,400 on the sale. Stark still owes Panther $71,600 (current liability) related to the land sale.

At the end of 2018, Panther and Stark prepared the following statements in preparation for consolidation.

	Panther, Inc.				Stark Corporation
Revenues	$	(820,000	)		$	(378,000	)
Cost of goods sold		352,600				198,300
Other operating expenses		193,000				84,900
Gain on sale of land		(18,400	)			0
Equity in Stark's earnings		(56,900	)			0
Net income	$	(349,700	)		$	(94,800	)
Retained earnings 1/1/18	$	(374,500	)		$	(307,800	)
Net income		(349,700	)			(94,800	)
Dividends declared		95,500				32,500
Retained earnings 12/31/18	$	(628,700	)		$	(370,100	)
Cash and receivables	$	125,000			$	177,000
Inventory		380,800				126,100
Investment in Stark		728,500				0
Trademarks		0				66,400
Land, buildings, and equip. (net)		781,800				320,500
Patented technology		0				143,000
Total assets	$	2,016,100			$	833,000
Liabilities	$	(668,300	)		$	(277,450	)
Common stock		(400,000	)			(155,000	)
Additional paid-in capital		(319,100	)			(30,450	)
Retained earnings 12/31/18		(628,700	)			(370,100	)
Total liabilities and equity	$	(2,016,100	)		$	(833,000	)

1. Show how Panther computed its $56,900 equity in Stark's earnings balance.

2. Prepare a 2018 consolidated worksheet for Panther and Stark.

Answer 1

SOLUTION:

Total fair value of $ 588,000 for 100% of Stark corporation's outstanding ownership shares

Stark's Book value at the time of acquisition was $ 324,000

1. Excess fair value over book value = 588,000 - 324,000 = 264,000

2. Amortization Schedule:

- The fair value of its trademarks was assessed to be $ 62,000 more than their carrying amounts.

- Stark's patented technology was undervalued in its accounting records by $ 202,000

- The estimated remaining life of the patented techology was 8 years.

Hence, Annula amortization is $ 25250 (202000/8)

Useful life in years is NA

3. Elimination of inventory mark up:

In 2017, Stark had panther inventory costing $90000 for $180000

Gross profit rate = (180000-90000) / 180000 = 90000/180000 = 50%

Year end Inventory at transfer price = 180000 * 31% = 55800

Gross profit deferral for 2017 :

Recorded a gain of $ 18,400

Gross profit deferral = 18400 * 50% = $ 9200

In 2018, Panther bought from Stark $ 164000 of inventory. Original Cost $ 82000

At the end of 2018, panther held $ 44300

Year End Inventory = 44300

Gross Profit rate = (164000-82000) / 164000 = 82000 / 164000 = 50%

Gross Profit deferral = 44300 * 50 % = $ 22150

4. Elimination of Equipment mark up down stream:

During 2018, Panther sold Stark a parcel of land for $ 103000 and recorded gain of .$18400

still owes panther $ 71600

Part A:

COMPUTING OF EQUITY IN STARK BALANCE

PARTICULARS	AMOUNT
Net Income in 2018	94800
Less : Annual Amortization	(25250)
Less : gain recorded	(18400)
Less : Profit deferral (2018)	(22150)
Add : Profit deferral (2017)	9200
Year End Balance of Equaity in Stark's Earnings	38200

Part B:

CONSOLIDATED WORKSHEET FOR THE YEAR ENDING DECEMBER 31, 2018

Accounts	Pather	Stark		Debit		Credit	Totals
Revenue	820000	378000
Cost of Goods Sold	352600	198300	G	22150
Other Operating Exp	193000	84900					277900
Amortization Exp.	-	-		25250
Gain on sale of land	18400	-		18400
Equity in stark's Earnings	56900	-		38200
Net Income	349700	94800					349700
Retained Earnings% 1/1/2018	374500	307800	S	307800			374500
Net Income	349700	94800					349700
Dividend declared	95500	32500				32500	95500
retained earnings 31/12/2018	628700	370100					628700
Cash & Receivables	125000	177000			E	71600	373600
Inventory	380800	126100			G	22150	484750
Investment in Stark	728500				A	238750
					S	493250
Trademark		66400	A	62000			128400
Patended Technology		143000	A	176750	C	25250	294500
land, building & Net	781800	320500			F	18400	1120700
Total Assets	2016100	833000
Liabilities	668300	277450	E	71600			874150
Common stock	400000	155000	S	155000			400000
Additional Paid in capital	319100	30450	S	30450			319100
Retained Earnings 31/12/2018	628700	370100					928700
Total Liabilities	2016100	833000					2521950