On January 1, 2016, Plymouth Corporation acquired 80 percent of the outstanding
ID: 2542027 • Letter: O
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:
A.) Prepare a schedule that calculates the Equity in Earnings of Sander account balance.
B.) Prepare a worksheet to arrive at consolidated figures for external reporting purposes. At year end, there are no intra-entity payables or receivables.
Year Intra-EntitySales Intra-Entity
Ending Inventory
at Transfer Price Gross Profit Rate
on Intra-Entity
Inventory Transfers 2016 $ 125,000 $ 80,000 25 % 2017 220,000 125,000 28 2018 300,000 160,000 25
Explanation / Answer
a. 2016 net income reported by Sander $230,000
Excess patent fair value amortization ($350,000 ÷ 5 years) (70,000)
Deferred gross profit for 12/31/17 intra-entity inventory (160,000 × 25%) (40,000)
Recognized gross profit for 1/1/17 intra-entity inventory (125,000 × 28%) 35,000
Sander’s net income adjusted $155,000
To controlling interest (80%) $124,000
To noncontrolling interest (20%) $31,000
Adjustments
b.
Plymouth
Sander
& Eliminations
NCI
Consolidated
Revenues
(1,740,000)
(950,000)
(TI) 300,000
(2,390,000)
Cost of goods sold
820,000
500,000
(G) 40,000
(TI)300,000
1,025,000
(*G) 35,000
Depreciation expense
104,000
85,000
189,000
Amortization expense
220,000
120,000
(E) 70,000
410,000
Interest expense
20,000
15,000
35,000
Equity in earnings of Sander
(124,000)
(I) 124,000
0
Separate company net income
(700,000)
(230,000)
Consolidated net income
(731,000)
to noncontrolling
interest
(31,000)
31,000
to Plymouth Corp.
(700,000)
Retained earnings 1/1
(2,800,000)
(345,000)
(S) 310,000
(2,800,000)
(*G) 35,000
Net income
(700,000)
(230,000)
(700,000)
Dividends declared
200,000
25,000
(D) 20,000
5,000
200,000
Retained earnings 12/31
(3,300,000)
(550,000)
(3,300,000)
Cash
535,000
115,000
650,000
Accounts receivable
575,000
215,000
790,000
Inventory
990,000
800,000
(G) 40,000
1,750,000
Investment in Sander
1,420,000
(D) 20,000
(S)968,000
(A)348,000
0
(I) 124,000
Buildings and equipment
1,025,000
863,000
1,888,000
Patents
950,000
107,000
(A) 210,000
(E) 70,000
1,197,000
Goodwill
(A) 225,000
225,000
Total Assets
5,495,000
2,100,000
6,500,000
Accounts payable
(450,000)
(200,000)
(650,000)
Notes payable
(545,000)
(450,000)
(995,000)
Noncontrolling interest 1/1
(S)242,000
(A) 87,000
(329,000)
Noncontrolling interest 12/31
(355,000)
(355,000)
Common stock
(900,000)
(800,000)
(S) 800,000
(900,000)
APIC
(300,000)
(100,000)
(S) 100,000
(300,000)
Retained earnings 12/31
(3,300,000)
(550,000)
(3,300,000)
Total liab. and SE
(5,495,000)
(2,100,000)
2,234,000
2,234,000
(6,500,000)
Adjustments
b.
Plymouth
Sander
& Eliminations
NCI
Consolidated
Revenues
(1,740,000)
(950,000)
(TI) 300,000
(2,390,000)
Cost of goods sold
820,000
500,000
(G) 40,000
(TI)300,000
1,025,000
(*G) 35,000
Depreciation expense
104,000
85,000
189,000
Amortization expense
220,000
120,000
(E) 70,000
410,000
Interest expense
20,000
15,000
35,000
Equity in earnings of Sander
(124,000)
(I) 124,000
0
Separate company net income
(700,000)
(230,000)
Consolidated net income
(731,000)
to noncontrolling
interest
(31,000)
31,000
to Plymouth Corp.
(700,000)
Retained earnings 1/1
(2,800,000)
(345,000)
(S) 310,000
(2,800,000)
(*G) 35,000
Net income
(700,000)
(230,000)
(700,000)
Dividends declared
200,000
25,000
(D) 20,000
5,000
200,000
Retained earnings 12/31
(3,300,000)
(550,000)
(3,300,000)
Cash
535,000
115,000
650,000
Accounts receivable
575,000
215,000
790,000
Inventory
990,000
800,000
(G) 40,000
1,750,000
Investment in Sander
1,420,000
(D) 20,000
(S)968,000
(A)348,000
0
(I) 124,000
Buildings and equipment
1,025,000
863,000
1,888,000
Patents
950,000
107,000
(A) 210,000
(E) 70,000
1,197,000
Goodwill
(A) 225,000
225,000
Total Assets
5,495,000
2,100,000
6,500,000
Accounts payable
(450,000)
(200,000)
(650,000)
Notes payable
(545,000)
(450,000)
(995,000)
Noncontrolling interest 1/1
(S)242,000
(A) 87,000
(329,000)
Noncontrolling interest 12/31
(355,000)
(355,000)
Common stock
(900,000)
(800,000)
(S) 800,000
(900,000)
APIC
(300,000)
(100,000)
(S) 100,000
(300,000)
Retained earnings 12/31
(3,300,000)
(550,000)
(3,300,000)
Total liab. and SE
(5,495,000)
(2,100,000)
2,234,000
2,234,000
(6,500,000)