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)