On January 1 2009, Plymouth Corporation acpuired 80% 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 bussiness fair value at $1,500,000. Since that time, Sander has niether issued nor reacquired any shares of its own stock. The book value of Sanders individual assets and liabilities approximated their aquisition-date fair values except for the patent account, which was undervalued by $350,000. The undervalued patents had a 5year remaining life at the aquisition date. Any remaining excess fair value was attributed to goodwill. No goodwill impairements have occured. Sanders regularly sella inventory to Plymouth. Bellow are details of the intra entity inventory sales for the past three years:
Year Intra Intra Entity End Gross profit rate entity Sales inv At transfer price on Intra entity Inv trans
- 2009 $125,000 $ 80,000 25%
- 2010 220,000 125,000 28%
- 2011 300,000 160,000 25%
Seperate financial statements for these two companies as of December 31. 2011, Follow:
Plymouth Sanders
- 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 sanders (124,000) 0
- Net income $ (700,000) (230,000)
- Retained earnings 1/1/11 $(2,800,000) (345,000)
- Net Income (700,000) (230,000)
- Dividends paid 200,000 25,000
- Retained earnings12/31/11 $(3,300,000) (550,000)
- Cash $ 535,000 115,000
- Account receivable 575,000 215,000
- Inventory 990,000 800,000
- Investment in Sanders 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 (450,0000) (200,000)
- Notes payable (545,000) (450,000)
- Common stock (900,000) (800,000)
- Additional paid-in-capital (300,000) (100,000)
- Retained earnings 12/31/11 (3,300,000) (550,000)
- Total liabilities & Stock
- holders equity $(5,495,000) $(2,100,000)
a. Prepare a schedual that calculates the equity in Earnings of Sanders account balance.
b. Prepare a worksheet to arrive at consolidated figures for external reporting purposes