Question

In: Accounting

On January 1, 2016, Plymouth Corporation acquired 80 percent of the outstanding voting stock of Sander...

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:

Year Intra-Entity
Sales
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

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 )
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 )

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.

Solutions

Expert Solution

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)


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