Today is January 1, 2020, and Rent & Roll Music Company has just won a bidding war for a portfolio of certain recordings of Chuck Berry and Elvis Presley. Rent & Roll paid a total of $ 20,137,950 for the catalog, and hopes to sell the recordings on the internet for $ 1.00 per song. Assume that there is no cost of distributing these recordings via the internet. For sake of simplicity, assume that the recordings enter into the “public domain” on December 31, 2049, thirty years after the purchase. At that point, the recordings would become freely available on the internet, and Rent & Roll’s revenue stream would disappear. Initially, Rent & Roll hoped to “sell” 500,000 Chuck Berry songs and 2,000,000 Elvis Presley songs each year. When determining the amount to pay for the catalog, Rent & Roll discounted the projected cash flows at an interest rate of 12% per annum, resulting in the purchase price (i.e. ($ 500,000 + 2,000,000) x PVAn=30,i=12% = $ 20,137,950). After a discussion with their auditor, Rent & Roll decided that they should report two distinct intangible assets, one for the rights to the Chuck Berry recordings and a separate asset for the rights to the Elvis Presley recordings. When necessary, please refer to the following present value annuity factors: Number of Years (n) 5 15 25 30 Present Value Annuity (PVA) Factor @ 12% 3.60478 6.81086 7.84314 8.05518 Given the information provided above, please answer the following questions: (1) Under current U.S. GAAP, assuming no impairment, at what amount would Rent & Roll report their rights to the Elvis Presley recordings on their December 31, 2024 Balance Sheet (i.e. the Balance Sheet five years after the recordings were acquired)? (1) Suppose that on December 31, 2024, Rent & Roll estimated that they would only be able to sell 600,000 Elvis Presley recordings each year over the remaining 25 years that they maintained the legal rights to those recordings. Would your answer to Part A change? Why or why not?
Today is January 1, 2020, and Rent & Roll Music Company has just won a bidding war for a portfolio of certain recordings of Chuck Berry and Elvis Presley. Rent & Roll paid a total of $ 20,137,950 for the catalog, and hopes to sell the recordings on the internet for $ 1.00 per song. Assume that there is no cost of distributing these recordings via the internet.
For sake of simplicity, assume that the recordings enter into the “public domain” on December 31, 2049, thirty years after the purchase. At that point, the recordings would become freely available on the internet, and Rent & Roll’s revenue stream would disappear.
Initially, Rent & Roll hoped to “sell” 500,000 Chuck Berry songs and 2,000,000 Elvis Presley songs each year. When determining the amount to pay for the catalog, Rent & Roll discounted the projected
After a discussion with their auditor, Rent & Roll decided that they should report
two distinct intangible assets, one for the rights to the Chuck Berry recordings and a separate asset for the rights to the Elvis Presley recordings.
When necessary, please refer to the following present value annuity factors:
Number of Years (n)
5 15 25 30
Present Value Annuity (PVA) Factor @ 12% 3.60478 6.81086 7.84314 8.05518
Given the information provided above, please answer the following questions:
- (1) Under current U.S. GAAP, assuming no impairment, at what amount would
Rent & Roll report their rights to the Elvis Presley recordings on their December
31, 2024
acquired)?
- (1) Suppose that on December 31, 2024, Rent & Roll estimated that they would only
be able to sell 600,000 Elvis Presley recordings each year over the remaining 25
years that they maintained the legal rights to those recordings. Would your answer
to Part A change? Why or why not?
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