Question

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $313,800. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $185,500. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $209,200. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $76,300 and an unrecorded customer list (15-year remaining life) assessed at a $52,200 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	$126,000	$157,500	$52,500
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	$	(723,000	)		$	(358,000	)
Cost of goods sold		475,200				218,800
Operating expenses		195,410				74,600
Equity in earnings in Stinson		(33,194	)			0
Net income	$	(85,584	)		$	(64,600	)
Retained earnings, 1/1/18	$	(768,000	)		$	(282,000	)
Net income		(85,584	)			(64,600	)
Dividends declared		47,400				17,600
Retained earnings, 12/31/18	$	(806,184	)		$	(329,000	)
Cash and receivables	$	275,000			$	149,800
Inventory		258,300				130,600
Investment in Stinson		377,168				0
Buildings (net)		333,000				204,300
Equipment (net)		237,800				88,000
Patents (net)		0				22,400
Total assets	$	1,481,268			$	595,100
Liabilities	$	(375,084	)		$	(166,100	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/18		(806,184	)			(329,000	)
Total liabilities and equities	$	(1,481,268	)		$	(595,100	)

1. Show how McIlroy determined the $377,168 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

Please find below table useful to compute desired results: -

F GH Determination of Investment in Stinson Account Balance Consideration Transferred =D1 Increase in Stinson's retained earnings "=(282000-185500)*0.6 | Excess fair value amortization (60%) =D11*0.6 Ending inventory Profit deferral =C25 1=13-14-15 Mcllroy's equity earnings in Stinson 33194 Stinson dividends paid to Mcllroy =17600*0.6 Investment account Balance =J2+J5+J6-J7 10 15 A B 1 Consideration transferred 313800 2 Noncontrolling Interest Fair Value 209200 3 Subsidiary fair value at Acquisition date =D1+D2 4 Acquisition date book value =100000+185500 5 Fair value in excess of book value =D3-D4 6 Excess fair value assignments 7 Amortisation 8 To patents 76300 =B8/CS 9 to customer list 52200 =B9/C9 10 to goodwill =D5-B8-B9 11 =D8+D9+D10 12 13 Stinson's Income 64600 14 Excess fair value amortization =D11 15 Adjusted net income =D13-D14 16 Mcllroy's Percentage Ownership =60/100 17 Mcllroy's share of Stinson's income =D15*D16 18 Intra-entity inventory profit recognized =C25 19 Intra-entity inventory profit deferred =D25 20 Mcllroy's equity earnings in Stinson =D17+D18-019 21 22 Intra entity Profits 23 Intra entity Transfers remaining in inventory 52500 37600 24 Gross profit rate =(157500-126000/157500 =(150400-112800)/150400 25 Intra entity Profits =C23*C24 =D23*D24

End results would be as follows: -

D F G Determination of Investment in Stinson Account Balance Consideration Transferred $313.800.000 Increase in Stinson's retained earnings S57,900.00|| Excess fair value amortization(60%) $6,666.00 Ending inventory Profit deferral $10.500.00 $40.734.00 Mcllroy's equity earnings in Stinson $33.194.00 Stinson dividends paid to Mcllroy $10,560.00 Investment account Balance $377.168.00 Life A BC 1 Consideration transferred $313.800.00 2 Noncontrolling Interest Fair Value $209,200.00 3 Subsidiary fair value at Acquisition date $523,000.00 4 Acquisition date book value $285,500.00 5 Fair value in excess of book value $237,500.00 6 Excess fair value assignments 7 Amortisation 8 To patents $76,300.00 10 $7.630.000 9 to customer list $52,200.00 15 $3,480.00 10 to goodwill $109,000.00 11 $11.110.00 12 13 Stinson's Income $64.600.00 14 Excess fair value amortization $11,110.00 15 Adjusted net income $53,490.00 16 Mcllroy's Percentage Ownership 60% 17 Mcllroy's share of Stinson's income $32.094.00 18 Intra-entity inventory profit recognized $10.500.00 19 Intra-entity inventory profit deferred $9.400.00 20 Mcllroy's equity earnings in Stinson $33.194.00 21 22 Intra entity Profits 23 Intra entity Transfers remaining in inventory 24 Gross profit rate 25 Intra entity Profits S52,500.00 $37,600.00 20% 25% $10,500.00 $9.400.00