Question

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

Penske Stanza
Revenues $(842,000 ) $(568,000 )
Cost of goods sold 299,700 142,000
Depreciation expense 207,000 304,000
Investment income Not given 0
Dividends declared 80,000 60,000
Retained earnings, 1/1/21 (668,000 ) (222,000 )
Current assets 572,000 566,000
Copyrights 1,076,000 449,500
Royalty agreements 604,000 1,180,000
Investment in Stanza Not given 0
Liabilities (546,000 ) (1,631,500 )
Common stock (600,000 )($20 par) (200,000 ) ($10 par)
Additional paid-in capital 150,000 80,000


On January 1, 2013, Penske acquired all of Stanza's outstanding stock for $680,000 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 $440,000 book value but a fair value of $560,000.

a. As of December 31,2013, what is the consolidated copyrights balance?
b. For the year ending December 31,2013, what is consolidated net income?
c. As of December 31,2013, what is the consolidated retained earnings balance?
d. As of December 31,2013, what is the consolidated balance to be reported for goodwill?

Answer 1

a. The consolidated copyrights balance as of December 31, 2013, is $466,667. b. The consolidated net income for the year ending December 31, 2013, is $968,300. c. The consolidated retained earnings balance as of December 31, 2013, is $78,300. d. Without the information about the investment in Stanza, we cannot calculate the consolidated balance to be reported for goodwill.

Step-by-step explanation:

a. To calculate the consolidated copyrights balance as of December 31, 2013, we need to consider the fair value of copyrights acquired by Penske at the date of acquisition. The initial fair value of copyrights was $560,000, and they had a remaining life of 6 years. Therefore, the annual amortization expense for copyrights would be $560,000 / 6 = $93,333. Since 2013 represents one year after the acquisition date, the amortization expense for the year would be $93,333.

To calculate the consolidated copyrights balance, we would subtract the cumulative amortization expense from the initial fair value of copyrights: $560,000 - $93,333 = $466,667.

b. To calculate the consolidated net income for the year ending December 31, 2013, we need to consider the revenues and expenses of both Penske and Stanza. Consolidated net income is calculated by adding the revenues and subtracting the expenses. The revenues for Penske and Stanza are $842,000 and $568,000 respectively. The expenses for Penske and Stanza are $299,700 and $142,000 respectively. Therefore, consolidated net income would be: $842,000 + $568,000 - $299,700 - $142,000 = $968,300.

c. The consolidated retained earnings balance can be calculated by adding the retained earnings of Penske and Stanza at the beginning of the year, and then adding the consolidated net income calculated in part (b). The retained earnings for Penske and Stanza at the beginning of the year are ($668,000) and ($222,000) respectively. The consolidated net income calculated in part (b) is $968,300. Therefore, the consolidated retained earnings balance would be: ($668,000) + ($222,000) + $968,300 = $78,300.

d. The consolidated balance to be reported for goodwill can be calculated by comparing the fair value of net assets acquired with the book value of net assets acquired. The fair value of net assets acquired by Penske is the sum of fair values of copyrights ($560,000) and the investment in Stanza (not given). The book value of net assets acquired is the sum of the book values of copyrights ($440,000), the investment in Stanza (not given), and the difference between the book value of common stock and the fair value of common stock issued ($600,000 - $680,000 = ($80,000)). Since the investment in Stanza is not given, we cannot calculate the consolidated balance to be reported for goodwill without that information.