Question

On January 1, 2017, Mcllroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $334,200. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $197,600. Also, the acquisition date fair value of the 40 percent noncontrolling interest was $222,800. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $75,700 and an unrecorded customer list (15-year remaining life) assessed at a $51,300 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 2017 2018 Cost to McIlroy $124,800 112,500 Transfer Price to Stinson $156,000 150,000 Ending Balance (at transfer price) $52,000 37,500 The individual financial statements for these two companies as of December 31, 2018, and the year then ended follow: Sales 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 Inventory Investment in Stinson Buildings (net) Equipment (net) Patents (net) McIlroy, Inc. $ (720,000) 473,200 194, 415 (33,071) $ (85,456) $ (761,700) (85, 456) 47,000 $ (800, 156) 272,700 256,100 390, 477 332,000 237,100 Stinson, Inc. $ (357,000) 218,200 74,400 0 $ (64,400) $ (281, 800) (64,400) 17,200 $ (329,000) $ 149,800 130, 600 0 203,900 87,800 22,300

Answer 1

Part A

Determination of Investment in Stinson account balance

Consideration transferred		334200
Increase in Stinson's retained earnings	50520
Excess fair value amortization	(6594)
2017 ending inventory profit deferral	(10400)	33526
McIlroy's equity earnings in Stinson for 2018		33071
Stinson 2018 dividends declared to McIlroy		(10320)
Investment account balance 12/31/18		390477

(281800-197600)*60% = 38640

10990*60% = 6594

17200*60% =9900

Acquisition-date fair value allocation and excess amortizations

Consideration transferred	334200
Noncontrolling interest fair value	222800
Subsidiary fair value at acquisition-date	557000
Acquisition-date book value	297600
Fair value in excess of book value	259400
		Life in Years	Annual Excess Amortizations
Excess fair value assignments
to patents	75700	10	7570
to customer list	51300	15	3420
to goodwill	132400	indefinite	-
			10990

100000+197600 = 297600

259400-75700-51300 = 132400

	2017	2018
Intra-entity profits (downstream)	52000	37500
Intra-entity transfers remaining in inventory	20%	25%
Gross profit rate	10400	9375

1-(124800/156000) = 20%

1-(112500/150000)= 25%

Stinson's 2018 income	64400
Excess fair value amortization	(10990)
Adjusted net income	53410
McIlroy's percentage ownership	60%
McIlroy's share of Stinson's adjusted net income	32046
2017 Intra-entity inventory profit recognized	10400
2018 Intra-entity inventory profit deferred	(9375)
McIlroy's equity earnings in Stinson	$33071

Part B

Consolidation Worksheet

Year Ending December 31, 2018

			Adjustments & Eliminations
	McIlroy	Stinson	Debit	Credit	Noncontrolling interest	Consolidate Totals
Sales	(720000)	(357000)	150000			(927000)
Cost of goods sold	473200	218200	9375	160400		540375
Operating expenses	194415	74400	10990			279805
Equity in earnings of Stinson	(33071)	0	33071			0
Separate company net income	(85456)	(64400)
Consolidated net income						(106820)
To noncontrolling interest					(21364)	21364
To McIlroy, Inc.						(85456)
Retained earnings, 1/1	(761700)	(281800)	281800			(761700)
Net income	(85456)	(64400)				(85456)
Dividends declared	47000	17200		9900	7300	47000
Retained earnings, 12/31	(800156)	(329000)				(800156)
Cash and receivables	272700	149800				422500
Inventory	256100	130600		9375		377325
Investment in Stinson	390477	0	9900	400377		0
Buildings (net)	332000	203900				535900
Equipment (net)	237100	87800				324900
Patents (net)	0	22300	75700	7570		90430
Customer list			51300	3420		47880
Goodwill			132400			132400
Total assets	1488377	594400				1931335
Liabilities	(388221)	(165400)				(553621)
Common stock	(300000)	(100000)	100000			(300000)
Noncontrolling interest 1/1				263494	263494
Noncontrolling interest 12/31						(277558)
Retained earnings 12/31	(800156)	(329000)				(800156)
Total liabilities and equity	(1488377)	(594400)	854536	854536		(1931335)