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 Intra-Entity Rate on Ending Inv. Intra-Entity Intra-Entity Transfer Inventory Year Sales Price Transfers 2016 $ 125,000 $ 80,000 25% 2017 220,000 125,000 28% 2018 300,000 160,000 25% Separate financial statements as of December 31, 2018: 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) - Net income $ (700,000) $ (230,000) Retained earnings, 1/1/18 $ (2,800,000) $ (345,000) Net income (700,000) (230,000) Dividends paid 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 Inventories 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) (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?
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 Intra-Entity Rate on Ending Inv. Intra-Entity Intra-Entity Transfer Inventory Year Sales Price Transfers 2016 $ 125,000 $ 80,000 25% 2017 220,000 125,000 28% 2018 300,000 160,000 25% Separate financial statements as of December 31, 2018: 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) - Net income $ (700,000) $ (230,000) Retained earnings, 1/1/18 $ (2,800,000) $ (345,000) Net income (700,000) (230,000) Dividends paid 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 Inventories 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) (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?
Chapter6: Corporations: Redemptions And Liquidations
Section: Chapter Questions
Problem 33CE
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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
Sander regularly sells inventory to Plymouth. Below are details of the intra-entity inventory sales for the past three years:
| Gross Profit | |||
| Intra-Entity | Rate on | ||
| Ending Inv. | Intra-Entity | ||
| Intra-Entity | Transfer | Inventory | |
| Year | Sales | Price | Transfers |
| 2016 | $ 125,000 | $ 80,000 | 25% |
| 2017 | 220,000 | 125,000 | 28% |
| 2018 | 300,000 | 160,000 | 25% |
| Separate financial statements as of December 31, 2018: | ||
| Plymouth | Sander | |
| Revenues | $ (1,740,000) | $ (950,000) |
| Cost of goods sold | 820,000 | 500,000 |
| 104,000 | 85,000 | |
| Amortization expense | 220,000 | 120,000 |
| Interest expense | 20,000 | 15,000 |
| Equity in earnings of Sander | (124,000) | - |
| Net income | $ (700,000) | $ (230,000) |
| $ (2,800,000) | $ (345,000) | |
| Net income | (700,000) | (230,000) |
| Dividends paid | 200,000 | 25,000 |
| Retained earnings, 12/31/18 | $ (3,300,000) | $ (550,000) |
| Cash | $ 535,000 | $ 115,000 |
| 575,000 | 215,000 | |
| Inventories | 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) | (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 |
$ (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?
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