Question

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $384,600. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $227,300. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $256,400. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $83,800 and an unrecorded customer list (15-year remaining life) assessed at a $59,700 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Since acquisition, McIlroy has applied the equity method to its Investment in Stinson account and no goodwill impairment has occurred. At year end, there are no intra-entity payables or receivables.

Intra-entity inventory sales between the two companies have been made as follows:

Year	Cost to McIlroy	Transfer Price to Stinson	Ending Balance (at transfer price)
2017	$133,800	$167,250	$55,750
2018	112,500	150,000	37,500

The individual financial statements for these two companies as of December 31, 2018, and the year then ended follow:

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(749,000	)		$	(385,000	)
Cost of goods sold		492,200				235,000
Operating expenses		200,935				80,000
Equity in earnings in Stinson		(36,359	)			0
Net income	$	(92,224	)		$	(70,000	)
Retained earnings, 1/1/18	$	(810,300	)		$	(284,600	)
Net income		(92,224	)			(70,000	)
Dividends declared		50,100				20,100
Retained earnings, 12/31/18	$	(852,424	)		$	(334,500	)
Cash and receivables	$	290,200			$	152,300
Inventory		272,600				132,700
Investment in Stinson		424,713				0
Buildings (net)		355,000				207,500
Equipment (net)		253,300				90,800
Patents (net)		0				25,500
Total assets	$	1,595,813			$	608,800
Liabilities	$	(443,389	)		$	(174,300	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/18		(852,424	)			(334,500	)
Total liabilities and equities	$	(1,595,813	)		$	(608,800	)

Show how McIlroy determined the $424,713 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018.

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Acquisition-date fair value allocation and excess amortizations
a. Consideration transferred					$ 384,600
Noncontrolling interest fair value					256,400
Subsidiary fair value at acquisition-date					$ 641,000
Acquisition-date book value					(327,300)
Fair value in excess of book value					$ 313,700			Annual
							Life in	Excess
Excess fair value assignments							Years	Amortizations
to patents					83,800		10	$               8,380
to customer list					59,700		15	3,980
to goodwill					$ 170,200		indefinite	-
								$             12,360
Determination of Investment in Stinson account balance
Consideration transferred								$           384,600
Increase in Stinson's retained earnings (334500-284600)*0.6							$     29,940
Excess fair value amortization							(7,416)
2017 ending inventory profit deferral							(11,150)	11,374
McIlroy's equity earnings in Stinson for 2018 (calculate below)								36,359
Stinson 2018 dividends paid to McIlroy								(12,060)
Investment account balance 12/31/18								$           420,273
Stinson's 2018 income							$   70,000
Excess fair value amortization							(12,360)
Adjusted net income							$   57,640
McIlroy's percentage ownership							60%
McIlroy's share of Stinson's adjusted net income							$   34,584
2017 Intra-entity inventory profit recognized (calculate below)							11,150
2018 Intra-entity inventory profit deferred (calculate below)							(9,375)
McIlroy's equity earnings in Stinson							36,359
Intra-entity profits (downstream)					2017		2018
Intra-entity transfers remaining in inventory					55,750		37,500
Gross profit rate					20%		25%
					11,150		9,375
Consolidation Worksheet
Year Ending December 31, 2018
								Non-
				Adjustments & Eliminations				controlling	Consolidated
b.		McIlroy	Stinson		Debit		Credit	Interest	Totals
Sales		(749,000)	(385,000)	[TI]	150,000				(984,000)
Cost of goods sold		492,200	235,000	[G]	9,375	[*G]	11,150		575,425
						[TI]	150,000
Operating expenses		200,935	80,000	[E]	12,360				293,295
Income of Stinson		(36,359)	-	[I]	36,359				-
Separate company net income		(92,224)	(70,000)
Consolidated net income									(115,280)
To noncontrolling interest								-23,056	23,056
To parent									(92,224)
Retained earnings, 1/1		(810,300)	(284,600)	[S]	284,600				(810,300)
Net income		(92,224)	(70,000)						(92,224)
Dividends paid		50,100	20,100			[D]	12,060	8,040	50,100
Retained earnings, 12/31		(852,424)	(334,500)						(852,424)
Cash and receivables		290,200	152,300						442,500
Inventory		272,600	132,700			[G]	9,375		395,925
Investment in Stinson		424,713	-	[D]	12,060	[S]	230,760		-
				[*G]	11,150	[A]	180,804
						[I]	36,359
Buildings (net)		355,000	207,500						562,500
Equipment (net)		253,300	90,800						344,100
Patents (net)		-	25,500	[A]	75,420	[E]	8,380		92,540
Customer list				[A]	55,720	[E]	3,980		51,740
Goodwill				[A]	170,200				170,200
Total assets		1,595,813	608,800						2,059,505
Liabilities		(443,389)	(174,300)						(617,689)
Common stock		(300,000)	(100,000)	[S]	100,000				(300,000)
Noncontrolling interest 1/1						[S]	153,840
						[A]	120,536	(274,376)
Noncontrolling interest 12/31								289,392	(289,392)
Retained earnings 12/31		(852,424)	(334,500)						(852,424)
Total liabilities and equity		(1,595,813)	(608,800)		917,244		917,244		(2,059,505)