Equity in earnings of sander account balance

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Reference no: EM13918308

On January 1, 2013, 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 5-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

2013

$

125,000

 

$

80,000

 

 

25%

 

2014

 

220,000

 

 

125,000

 

 

28%

 

2015

 

300,000

 

 

160,000

 

 

25%

 

 

Separate financial statements for these two companies as of December 31, 2015, 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 1/1/15

$

(2,800,000)

$

(345,000)

     

  Net income

 

(700,000)

 

(230,000)

     

  Dividends declared

 

200,000   

 

25,000   

     
 

 

 

 

 

     

     Retained earnings 12/31/15

$

(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 12/31/15

 

(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.

Reference no: EM13918308

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