Question

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $358,200. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $211,800. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $238,800. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $89,200 and an unrecorded customer list (15-year remaining life) assessed at a $65,100 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	$139,200	$174,000	$58,000
2018	112,800	150,400	37,600

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

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(766,000	)		$	(407,000	)
Cost of goods sold		503,500				248,200
Operating expenses		203,560				84,400
Equity in earnings in Stinson		(38,884	)			0
Net income	$	(97,824	)		$	(74,400	)
Retained earnings, 1/1/18	$	(851,000	)		$	(286,900	)
Net income		(97,824	)			(74,400	)
Dividends declared		52,100				21,800
Retained earnings, 12/31/18	$	(896,724	)		$	(339,500	)
Cash and receivables	$	304,900			$	154,600
Inventory		286,500				134,600
Investment in Stinson		409,508				0
Buildings (net)		379,000				209,100
Equipment (net)		270,400				92,500
Patents (net)		0				27,600
Total assets	$	1,650,308			$	618,400
Liabilities	$	(453,584	)		$	(178,900	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/18		(896,724	)			(339,500	)
Total liabilities and equities	$	(1,650,308	)		$	(618,400	)

1. Show how McIlroy determined the $409,508 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

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

Answer 1

358,200 238,800 597,000 Acquisition Date Fair Value allocation and excess amortization Consideration Transferred Fair Value of Non Controlling Interest (NCI) Total Fair Value of Stinson Less: Book Value of Stinson Common Stock Retained Earnings Total Book Value of Stinson Fair Value in Excess of Book Value Excess Value Assigned to Specific Accounts 100,000 211,800 (311,800) 285,200 Life in Year Share of Controlling Interest in Amortization Share of NCI in Amortization (40%) 5,352 3,568 2,604 1,736 Annual Excess Amortization 8,920 4,340 (60%) Patents Customer List Goodwill (Balance) (285,200 -89,200 -65,100) Annual Excess Value 89,200 65,100 130,900 10 15 Indefinite 13,260 7,956 5,304 Excess Value as on 01/01/18 Patents Customer List Goodwill Total Value as on 01/01/18 = (Value as on 01/01/17 - Amortization) 01/01/17 Amortization 89,200 8 ,920 65,100 4,340 130,900 285,200 13,260 Share of Controlling Interest in Amortization Share of NCI in 01/01/18 (60%) Amortization (40%) 80,280 48,168 32,112 60,760 36,456 24,304 130,900 78,540 52,360 271,940 163,164 108,776

Calculation of Deferred profit on intra entity inventory sales Gross Profit as a percentage of Sale (D = (C/A) x 100) Ending Balance Transfer price Year[A] 2017 174,000 2018 150,400 Cost Price [B] 139,200 112,800 Gross Profit [C = (A-B)] 34,800 37,600 Deferred Profit at| year end (DE) 11,600 9,400 20% 25% 58,000 37,600 Calculation of Investment Balance 358,200 Consideration Transferred Increase in stinson's retained earning 1/1/17 to 1/1/18 Excess Fair Value amortization 2017 Ending Inventory deferral Mcllroy equity in earnings of Stinson for 2018 Stinson 2018 Dividends Declared to Mcllroy Investment in Stinson Balance on 12/31/2018 45,060 (7,956) (11,600) 25,504 38,884 (13,080) 409,508 Working Increase in Stinson's Retained Earnings Retained Earnings as on 01/01/18 Less: Retained Earnings as on 01/01/17 Increase in Stinson's Retained Earnings Share of Mcllroy (75,100 X 60%) 286,900 211,800 75,100 45,060 Share of Mcllroy in Stinson's Dividend Dividend Declared by Stinson's in 2018 Dividend declared to Mcllroy (21,800 X 60%) Dividend declared to NCI (21,800 x 40%) 21,800 13,080 8,720

Non Controlling Interest MCLLROY, INC AND STINSON INC. Consolidation Worksheet Year Ending December 31, 2018 Adjustment Entries Mcllroy, Inc Stinson, Inc Debit Credit (766,000) (407,000) [TI] 150,400 503,500 248,200 (G1) 9,400 162,000 203,560 84,400 (E] 13,260 (38,884) 38,884 (97,824) (74,400) Tul Consolidated Total (1,022,600) 599,100 301,220 Sales Cost of goods sold Operating Expense Equity in Earnings in Stinson Net Income Consolidated Net Income To Non Controlling Interest To Mcllroy, Inc. (W.N] (24,456) (122,280) 24,456 (97,824) 286. 286,900 Retained Earnings, 1/1 Net Income Dividend Declared Retained Earnings, 12/31 (851,000) (97,824) 52,100 (896,724) (286,900) [S] (74,400) 21,800 (339,500) (851,000) (97,824) 52,100 (896,724) L 13,080 [D] 8,720 154,600 134,600 459,500 411,700 304,900 286,500 409,508 379,000 270,400 9,400 434,188 Cash and Receivable Inventory Investment in Stinson Buildings (net) Equipment (net) Patents (net) Customer list Goodwill Total Assets [1] (W.N] 209,100 92,500 27,600 - [A] Al [A] 80,280 60,760 130,900 8,920 4,340 [E] [E] 588,100 362,900 98,960 56,420 130,900 2,108,480 L 1,650,308 618,400

(453,584) (300,000) (178,900) (100,000) [S] (632,484) (300,000) 100,000 263,536 (W.N] Liabilities Common Stock Non Controlling Interest 1/1 Non Controlling Interest 12/31 Retained Earnings 12/31 Total Liabilities and Equity (263,536) (279,272) (896,724) (1,650,308) (339,500) (618,400) (279,272) (896,724) (2,108,480) 895,464 895,464 Entries Explanantion: [TI] is to eliminate the current year intra entity inventory transfer [G] is to eliminate the 2018 deferred inventory profit [G1] is to eliminate the 2017 deferred inventory profit [1] is to eliminate the equity earnings [S] is to eliminate the subsidiary stockholders' equity balance and 40% assign to Non controlling interest [A] is to record the unamortized excess value of assets as on 01/01/18 [E] is to record the amortization expense on excess value [D] is to eliminate the intercompany dividend in 60% and 40 % between parent and NCI (21,800 x 60%), (21,800 x 40%) respectively. Calculation of NCI in Net Income of Stinson's Net Income 74,400 less: Excess Amortization (13,260) Adjusted Net Income 61,140 NCI Share in Net Income (61,140 x 40%) 24,456

Total Adjustment After Combining Multiple Debits and Credit Cost of goods sold Credit Intercompany Sales Entry [TI] 150,400 Beginning Deferred Profit [G] 11,600 Total Adjustment 162,000 Investment in Stinson Debit Credit 38,884 11,600 13,080 Entry 1 (Incnome from Stinson) Entry [G] Beginning Deferred Profit Enty [D] [Intercompany Dividend] Entry s Common stock (100,000 x 60%) Retained Earnings (286,900 x 60%) Entry A (Share in Excess Value) 60,000 172,140 163,164 Total 24,680 434.188 Noncontrolling Interest 1/1 Credit 40,000 Entry s Common stock (100,000 x 40%) Retained Earnings (286,900 x 40%) Entry A (Share in Excess Value) Total 114,760 108,776 263,536