Question

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

	Penske					Stanza
Revenues	$	(832,000	)			$	(424,000	)
Cost of goods sold		296,200					106,000
Depreciation expense		227,000					390,000
Investment income		Not given					0
Dividends declared		80,000					60,000
Retained earnings, 1/1/21		(614,000	)				(326,000	)
Current assets		570,000					698,000
Copyrights		920,000					501,000
Royalty agreements		626,000					1,160,000
Investment in Stanza		Not given					0
Liabilities		(606,000	)				(1,885,000	)
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 $874,000 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 $598,000 book value but a fair value of $700,000.

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

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

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

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

Answer 1

a.	Consolidated Copyrights balance	$1,506,000
b.	Consolidated Net Income	$219,800
c.	Consolidated Retained Earnings	$753,800
d.	Consolidated Goodwill	$166,000

(a)

Calculation of Allocation of Copyrights :-

Allocation of Copyrights = Fair Value - Book Value

                                         = $700,000 - $598,000

                                        = $102,000

Annual Excess Amortizations = $102,000 / 6 years

                                                = $17,000

Calculation of Book value of acquired (Subsidiary) company :-

Book Value = Beginning Retained Earnings + Common Stock + Additional Paid in Capital

Book Value = $326,000 + $200,000 + $80,000

                   = $606,000

Calculation of Consolidated copyrights balance :-

Penske Company	$920,000
Stanza Company	$501,000
Allocation of Copyrights	$102,000
Less: Amortization expense	($17,000)
Consolidated copyrights balance	$1,506,000

(b)

Calculation of Net income :-

Revenues (832,000 + 424,000)		$1,256,000
Less: Expenses
Cost of Goods sold (296,200 + 106,000)	$402,200
Depreciation (227,000 + 390,000)	$617,000
Excess Amortization	$17,000
Total Expenses		($1,036,200)
Net Income		$219,800

(c)

Calculation of Retained Earnings :-

Retained Earnings, 1/1/2021	$614,000
Add: Net Income, 2021	$219,800
Less: Dividend paid	($80,000)
Consolidated Retained Earnings	$753,800

(d)

Calculation of Goodwill :-

Acquisition	$874,000
Less: Book Value of Subsidiary company	($606,000)
Fair value in excess of Book Value	$268,000
Less: Allocation of Copyrights	($102,000)
Goodwill	$166,000

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