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: Gross Profit Rate on Intra-Entity Inventory Transfers Year 2016 2017 2018 Intra-Entity Sales $ 125,000 220,000 300,000 Intra-Entity Ending Inventory at Transfer Price $ 80.000 125,000 160,000 Separate financial statements for these two companies as of December 31, 2018, follow: $ Sander (950,000) 500.000 85,000 120.000 15,000 $ Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Equity in earnings of Sander Net income Retained earnings 1/1/18 Net income Dividends declared Retained earnings 12/31/18 Cash Accounts receivable Inventory Investment in Sander Buildings and equipment Patents Plymouth $(1,740,000) 820.000 104,000 220.000 20,000 (124.000) (700,000) $(2,800,000) (700,000) 200,000 $ (3,300,000) 535,000 575,000 990.000 1.420.000 1,025.000 950,000 $ 5,495,000 450.000) (545,000) (900,000) (300,000) __(3,300,000) $(5,495,000) (230,000) (345,000) (230,000) 25,000 (550.000) 115,000 215,000 800,000 S Total assets Accounts payable Notes payable Common stock Additional paid-in capital Retained earnings 12/31/18 Total liabilities and stockholders' equity 863.000 107,000 $2,100,000 $ (200,000) (450,000) (800,000) (100,000) (550,000) $(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.

Answer 1

Part A

2018 income reported by Sander	230000
Excess patent fair value amortization	(70000)
Deferred gross profit for 12/31/18 intra-entity inventory (125000*28%)	(40000)
Deferred gross profit for 1/1/18 intra-entity inventory (300000-160000)*25%	35000
Sander’s net income adjusted	155000
To controlling interest (80%)	124000
To noncontrolling interest (20%)	31000

Part B

	Plymouth	Sander	Debit	Credit	Noncontrolling interest	Consolidated totals
Revenues	(1740000)	(950000)	300000			(2390000)
Cost of goods sold	820000	500000	40000	335000		1025000
Depreciation expense	104000	85000				189000
Amortization expense	220000	120000	70000			410000
Interest expense	20000	15000				35000
Equity in earnings of Sander	(124000)		124000			0
Separate company net income	(700000)	(230000)
Consolidated net income						(731000)
NCI in consolidate net income					(31000)	31000
Controlling interest in CNI						(700000)
Retained earnings 1/1	(2800000)	(345000)	345000			(2800000)
Net income	(700000)	(230000)				(700000)
Dividends declared	200000	25000		20000	5000	200000
Retained earnings 12/31	(3300000)	(550000)				(3300000)
Cash	535000	115000				650000
Accounts receivable	575000	215000				790000
inventory	990000	800000		40000		1750000
Investment in Sadler	1420000		20000	1440000		0
Buildings and equipment	1025000	863000				1888000
Patents	950000	107000	2100000	70000		1197000
Goodwill			225000			225000
Total assets	5495000	2100000				6500000
Accounts payable	(450000)	(200000)				(650000)
Notes payable	(545000)	(450000)				(995000)
Noncontrolling interest 1/1				329000	(329000)
Noncontrolling interest 12/31					(355000)	(355000)
Common stock	(900000)	(800000)	800000			(900000)
APIC	(300000)	(100000)	100000			(300000)
Retained earnings 12/31	(3300000)	(550000)				(3300000)
Total liab. and SE	(5495000)	(2100000)	2234000	2234000		(6500000)