Question

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $392,400. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $231,900. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $261,600. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $81,700 and an unrecorded customer list (15-year remaining life) assessed at a $57,000 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	$130,800	$163,500	$54,500
2018	113,400	151,200	37,800

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

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(741,000	)		$	(377,000	)
Cost of goods sold		487,000				230,200
Operating expenses		199,020				78,400
Equity in earnings in Stinson		(35,308	)			0
Net income	$	(90,288	)		$	(68,400	)
Retained earnings, 1/1/18	$	(792,000	)		$	(283,800	)
Net income		(90,288	)			(68,400	)
Dividends declared		49,100				19,600
Retained earnings, 12/31/18	$	(833,188	)		$	(332,600	)
Cash and receivables	$	283,600			$	151,400
Inventory		266,400				132,000
Investment in Stinson		429,006				0
Buildings (net)		347,000				206,500
Equipment (net)		247,700				90,100
Patents (net)		0				24,800
Total assets	$	1,573,706			$	604,800
Liabilities	$	(440,518	)		$	(172,200	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/18		(833,188	)			(332,600	)
Total liabilities and equities	$	(1,573,706	)		$	(604,800	)
A. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018. The debit and credit of consolidation entries, the noncontrolling interest column and the consolidated total column are all necessary in answer.

Answer 1

Part A

Determination of Investment in Stinson account balance

Consideration transferred		392400
Increase in Stinson's retained earnings	31140
Excess fair value amortization	(7182)
2017 ending inventory profit deferral	(10900)	13058
McIlroy's equity earnings in Stinson for 2018		35308
Stinson 2018 dividends declared to McIlroy		(11760)
Investment account balance 12/31/18		$429006

(283800-231900)*60% = 31140

11970*60% = 7182

19600*60% =11760

Acquisition-date fair value allocation and excess amortizations

Consideration transferred	392400
Noncontrolling interest fair value	261600
Subsidiary fair value at acquisition-date	654000
Acquisition-date book value	331900
Fair value in excess of book value	322100
		Life in Years	Annual Excess Amortizations
Excess fair value assignments
to patents	81700	10	8170
to customer list	57000	15	3800
to goodwill	183400	indefinite	-
			11970

100000+231900 = 331900

322100-81700-57000 = 183400

	2017	2018
Intra-entity profits (downstream)	54500	37800
Intra-entity transfers remaining in inventory	20%	25%
Gross profit rate	10900	9450

1-(130800/163500) = 20%

1-(113400/151200)= 25%

Stinson's 2018 income	68400
Excess fair value amortization	(11970)
Adjusted net income	56430
McIlroy's percentage ownership	60%
McIlroy's share of Stinson's adjusted net income	33858
2017 Intra-entity inventory profit recognized	10900
2018 Intra-entity inventory profit deferred	(9450)
McIlroy's equity earnings in Stinson	$35308

Part B

Consolidation Worksheet

Year Ending December 31, 2018

			Adjustments & Eliminations
	McIlroy	Stinson	Debit	Credit	Noncontrolling interest	Consolidate Totals
Sales	(741000)	(377000)	151200			(966800)
Cost of goods sold	487000	230200	9450	162100		564550
Operating expenses	199020	78400	11970			289390
Equity in earnings of Stinson	(35308)	0	35308			0
Separate company net income	(90288)	(68400)
Consolidated net income						(112860)
To noncontrolling interest					(22572)	22572
To McIlroy, Inc.						(90288)
Retained earnings, 1/1	(792000)	(283800)	283800			(792000)
Net income	(90288)	(68400)				(90288)
Dividends declared	49100	19600		11760	7840	49700
Retained earnings, 12/31	(833188)	(332600)				(833188)
Cash and receivables	283600	151400				435000
Inventory	266400	132000		9450		388950
Investment in Stinson	429006	0	11760	440766		0
Buildings (net)	347000	206500				553500
Equipment (net)	247700	90100				337800
Patents (net)	0	24800	81700	8170		98330
Customer list			57000	3920		53080
Goodwill			183400			183400
Total assets	1573706	604800				2050060
Liabilities	(440518)	(172200)				(612718)
Common stock	(300000)	(100000)	100000			(300000)
Noncontrolling interest 1/1				289422	(289422)
Noncontrolling interest 12/31					(304154)	(304154)
Retained earnings 12/31	(833188)	(332600)				(833188)
Total liabilities and equity	(1573706)	(604800)	925588	925588		(2050060)