In: Accounting
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 |
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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.
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 |
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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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