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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-EntitySales
Intra-EntityEnding Inventoryat Transfer Price
Gross Profit Rateon Intra-EntityInventory Transfers
2013
$
125,000
80,000
25%
2014
220,000
28%
2015
300,000
160,000
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
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)
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
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)
Common stock
(900,000)
(800,000)
Additional paid-in capital
(300,000)
(100,000)
Total liabilities and stockholders' equity
(5,495,000)
(2,100,000)
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