Question

On January 1, 2016, Plymouth Corporation acquired 80 percent of the outstanding voting stock of Sander Company in exchange for $1,200,000 cash. At that time, although Sander’s book value was $925,000, Plymouth assessed Sander’s total business fair value at $1,500,000. Since that time, Sander has neither issued nor reacquired any shares of its own stock.

The book values of Sander’s individual assets and liabilities approximated their acquisition-date fair values except for the patent account, which was undervalued by $350,000. The undervalued patents had a five-year remaining life at the acquisition date. Any remaining excess fair value was attributed to goodwill. No goodwill impairments have occurred.

Sander regularly sells inventory to Plymouth. Below are details of the intra-entity inventory sales for the past three years:

Separate financial statements for these two companies as of December 31, 2018, follow:

	Plymouth	Sander
Revenues	$(1,740,000)	$   (950,000)
Cost of goods sold	820,000	500,000
Depreciation expense	104,000	85,000
Amortization expense	220,000	120,000
Interest expense	20,000	15,000
Equity in earnings of Sander	(124,000)	–0–
Net income	$   (700,000)	$   (230,000) page 256
Retained earnings 1/1/18	$(2,800,000)	$   (345,000)
Net income	(700,000)	(230,000)
Dividends declared	200,000	25,000
Retained earnings, 12/31/18	$(3,300,000)	$    (550,000)
Cash	$  535,000	$  115,000
Accounts receivable	575,000	215,000
Inventory	990,000	800,000
Investment in Sander	1,420,000	–0–
Buildings and equipment	1,025,000	863,000
Patents	950,000	107,000
Total assets	$  5,495,000	$  2,100,000
Accounts payable	$   (450,000)	$    (200,000)
Notes payable	(545,000)	(450,000)
Common stock	(900,000)	(800,000)
Additional paid-in capital	(300,000)	(100,000)
Retained earnings, 12/31/18	(3,300,000)	(550,000)
Total liabilities and stockholders’ equity	$(5,495,000)	$(2,100,000)

1. Prepare a schedule that calculates the Equity in Earnings of Sander account balance.

2. Prepare a worksheet to arrive at consolidated figures for external reporting purposes. At year-end, there are no intra-entity payables or receivables.

Answer 1

ANSWER

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