Question

On January 1, 2020, Panther, Inc., issued securities with a total fair value of $577,000 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 $300,000, the fair value of its trademarks was assessed to be $45,000 more than their carrying amounts. Additionally, Stark’s patented technology was undervalued in its accounting records by $232,000. The trademarks were considered to have indefinite lives, and the estimated remaining life of the patented technology was eight years.

In 2020, Stark sold Panther inventory costing $75,000 for $125,000. As of December 31, 2020, Panther had resold 74 percent of this inventory. In 2021, Panther bought from Stark $140,000 of inventory that had an original cost of $70,000. At the end of 2021, Panther held $38,000 (transfer price) of inventory acquired from Stark, all from its 2021 purchases.

During 2021, Panther sold Stark a parcel of land for $88,000 and recorded a gain of $16,000 on the sale. Stark still owes Panther $62,000 (current liability) related to the land sale.

At the end of 2021, Panther and Stark prepared the following statements for consolidation.

	Panther, Inc.	Stark Corporation
Revenues	$ (710,000)	$(360,000)
Cost of goods sold	305,000	189,000
Other operating expenses	167,000	81,000
Gain on sale of land	(16,000)	–0–
Equity in Stark’s earnings	(39,000)	–0–
Net income	$ (293,000)	$ (90,000)
Retained earnings, 1/1/21	$ (367,000)	$(292,000)
Net income	(293,000)	(90,000)
Dividends declared	80,000	25,000
Retained earnings, 12/31/21	$ (580,000)	$(357,000)
Cash and receivables	$  102,000	$ 154,000
Inventory	311,000	110,000
Investment in Stark	691,000	–0–
Trademarks	–0–	58,000
Land, buildings, and equip. (net)	638,000	280,000
Patented technology	–0–	125,000
Total assets	$ 1,742,000	$ 727,000
Liabilities	$  (462,000)	$(220,000)
Common stock	(400,000)	(100,000)
Additional paid-in capital	(300,000)	(50,000)
Retained earnings, 12/31/21	(580,000)	(357,000)
Total liabilities and equity	$(1,742,000)	$(727,000)

1. Show how Panther computed its $39,000 equity in Stark’s earnings balance.

2. Prepare a 2021 consolidated worksheet for Panther and Stark.

Answer 1

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