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 Sanders book value was $925,000, Plymouth assessed Sanders total business fair value at $1,500,000. Since that time, Sander has neither issued nor reacquired any shares of its own stock.LO 5-2, 5-3, 5-4, 5-5

The book values of Sanders individual assets and liabilities approximated their acquisition-date fair values except for the patent account, which was undervalued by $350,000. The under-valued 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 Gross Profit Rate on Intra-

at Transfer Price 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)

COGS $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

Bldgs & Equip. $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)

Add'l paid-in capital $(300,000) $(100,000)

Retained earnings 12/31/15 $(3,300,000) $(550,000)

Total liabilities & 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.