Question

Problem 5-31 (LO 5-2,5-3,5-4,5-5) On January 1, 2017, Mcllroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $312.000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $184,400. Also, the acquisition date fair value of the 40 percent noncontrolling interest was $200,000. The subsidiary held patents with a 10-year remaining life, that were undervalued within the company's accounting records by $83.200 and an unrecorded customer list (15-year remaining life) assessed at a $58.800 Fair value. Any remaining excess acquisition date fair value was assigned to goodwill. Since acquisition, Mcllroy 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 5132, see 113,1ee Transfer Price to Stinson $166,125 150,Bee Ending Balance (at transfer price) $55,325 32,70 2018 The individual financial statements for these two companies as of December 31, 2018, and the year then ended follow McIlroy, Inc. $ (767,000) Stinson, Inc. ( 2.000) 79,400 5 35,945) (91,456) $ 69,600) Cost of goods sold Operating expenses Equity in earnings in Stinson Net Income Retained earnings, 1/1/18 Net Income Dividends declared Retained earnings, 12/31/18 Cash and receivables (254,300 (91,456) $ (333,700) an 377.657 Investment in S Buildings (net) Equipment (net) 251,200 $ 1,548,467 Total assets Liabides Common stock Retained earnings, 12/31/18 Total liabilities and equities 5(1,548,467) a. Show how Mcllroy determined the $377,467 Investment in Stinson account balance. Assume that Mcllroy defers 100 percent of downstream intra-entity profits against its share of Stinson's income. b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31 2018 Complete this question by entering your answers in the tabs below. Required A Required Show how Mcllroy determined the $377.467 Investment in Stinson account balance. Assume that Melry defers 100 percent of downstream intrarentit ofits acainst its share of Stinson's income

Answer 1

Part A

Determination of Investment in Stinson account balance

Consideration transferred		312000
Increase in Stinson's retained earnings	59940
Excess fair value amortization	(7344)
2017 ending inventory profit deferral	(11075)	41521
McIlroy's equity earnings in Stinson for 2018		35946
Stinson 2018 dividends declared to McIlroy		(12000)
Investment account balance 12/31/18		377467

(284300-184400)*60% = 59940

12240*60% = 7344

20000*60% =12000

Acquisition-date fair value allocation and excess amortizations

Consideration transferred	312000
Noncontrolling interest fair value	208000
Subsidiary fair value at acquisition-date	520000
Acquisition-date book value	284400
Fair value in excess of book value	235600
		Life in Years	Annual Excess Amortizations
Excess fair value assignments
to patents	83200	10	8320
to customer list	58800	15	3920
to goodwill	93600	indefinite	-
			12240

100000+184400 = 284400

235600-83200-58800 = 93600

	2017	2018
Intra-entity profits (downstream)	55375	37700
Intra-entity transfers remaining in inventory	20%	25%
Gross profit rate	11075	9425

1-(132900/166125) = 20%

1-(113100/150800)= 25%

Stinson's 2018 income	69400
Excess fair value amortization	(12240)
Adjusted net income	57160
McIlroy's percentage ownership	60%
McIlroy's share of Stinson's adjusted net income	34296
2017 Intra-entity inventory profit recognized	11075
2018 Intra-entity inventory profit deferred	(9425)
McIlroy's equity earnings in Stinson	$35946

Part B

Consolidation Worksheet

Year Ending December 31, 2018

			Adjustments & Eliminations
	McIlroy	Stinson	Debit	Credit	Noncontrolling interest	Consolidate Totals
Sales	(747000)	(382000)	150800			(978200)
Cost of goods sold	490900	233200	9425	161875		571650
Operating expenses	200590	79400	12240			290980
Equity in earnings of Stinson	(35946)	0	35946			0
Separate company net income	(91456)	(69400)
Consolidated net income						(114320)
To noncontrolling interest					(22864)	22864
To McIlroy, Inc.						(91456)
Retained earnings, 1/1	(814500)	(284300)	284300			(814500)
Net income	(91456)	(69400)				(91456)
Dividends declared	49700	20000		12000	8000	49700
Retained earnings, 12/31	(856256)	(333700)				(856256)
Cash and receivables	291900	151900				443800
Inventory	274200	132400		9425		397175
Investment in Stinson	377467	0	12000	389467		0
Buildings (net)	353000	207200				560200
Equipment (net)	251900	90600				342500
Patents (net)	0	25300	83200	8320		100180
Customer list			58800	3920		54880
Goodwill			93600			93600
Total assets	1548467	607400				1992335
Liabilities	(392211)	(173700)				(565911)
Common stock	(300000)	(100000)	100000			(300000)
Noncontrolling interest 1/1				255304	255304
Noncontrolling interest 12/31						(270168)
Retained earnings 12/31	(856256)	(333700)				(856256)
Total liabilities and equity	1548467	607400	840311	840311		(1931335)

150800+