Question

On January 1, 2020, Mcllroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $352,800. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $208,500. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $235,200. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $84,400 and an unrecorded customer list (15-year remaining life) assessed at a $60,300 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 2020 2021 Cost to McIlroy $134,700 112,500 Transfer Price to Stinson $168,375 150,000 Ending Balance (at transfer price) $56,125 37,500 The individual financial statements for these two companies as of December 31, 2021, and the year then ended follow: Stinson, Inc. $ (388,000) 236,800 80,600 Sales Cost of goods sold Operating expenses Equity in earnings in Stinson Net income Retained earnings, 1/1/21 Net income Dividends declared McIlroy, Inc. $ (750,000) 492,900 200,810 (36,734) $ (93,024) $ (818,600) (93,024) 50,200 $ (70,600) $ (285,000) (70,600) 20,200

Answer 1

1.

3,52,800 Determination of Investment in Stinson account balance Consideration transferred Increase in Stinson's retained earnings 1/1/20 to 1/1/21 ((285,000-208,500)*60%) Excess fair value amortization*60% 2020 ending inventory profit deferral (100%) Mcllroy's equity in earnings of Stinson for 2021 Stinson 2021 dividends declared to Mcllroy Investment account balance 12/31/21 45,900 -7,476 -11,225 27,199 36,734 -12,120 4,04,613 Working Notes: 1 Stinson's 2021 net income Excess fair value amortization Adjusted net income Mcllroy's percentage ownership Mcllroy's share of Stinson's adjusted net income 2020 intra-entity inventory profit recognized 2021 intra-entity inventory profit deferred Mcllroy's equity in earnings of Stinson 70,600 - 12,460 58,140 60% 34,884 11,225 -9,375 36,734 2 Consideration transferred Noncontrolling interest fair value Subsidiary fair value at acquisition-date Acquisition-date book value 3,52,800 2,35,200 5,88,000 3,08,500

2,79,500 Remaining Annual Excess Life Amortization Fair value in excess of book value Excess fair value assignments to patents to customer list to goodwill 84,400 60,300 1,34,800 84,400 60,300 10 15 8,440 4,020 12,460 3 Intra-entity profits (downstream) Intra-entity transfers remaining in inventory Gross profit rate** 2020 56,125 20% 11,225 2021 37,500 25% 9,375 **($168,375 - 134,700) = 168,375 = 20% (150,000 - 112,500) = 150,000= 25% 4 NCI beginning Share in increase in RE (285,000 - 208,500 - 12,460) * 0.4 NINIS (2018) (70,600 - 12,460 - 36,734) Dividends (20,200 * .40) NCI End 2,35,200 25,616 21,406 -8,080 2,74,142

2.

Cr Sales Cost of goods sold Operating expenses Equity in earnings in Stinson Net income 1,59,000 Mcllroy, Inc. Stinson, Inc. Dr -7,50,000 -3,88,000 1,50,000 4,92,900 2,36,800 9,375 2,00,810 80,600 12,460 -36,734 36,734 -93,024 -70,600 Consolidated -9,88,000 5,80,075 2,93,870 -1,14,055 -8,18,600 -93,024 Retained earnings, 1/1/21 Net income NINIS Dividends declared Retained earnings, 12/31/21 -2,85,000 2,85,000 -70,600 21,406 20,200 -3,35,400 -8,18,600 -1,14,055 21,406 50,200 -8,61,049 50,200 20,200 -8,61,424 1,52,700 1,33,000 4,46,000 3,99,125 3,30 2,75,500 4,04,613 3,58,000 2,55,400 9,375 4,04,613 16,880 8,040 Cash and receivables Inventory Investment in Stinson Buildings (net) Equipment (net) Patents (net) Customer list Goodwill Total assets Liabilities Common stock Retained earnings, 12/31/21 NCI Total liabilities and equities 2,07,600 91,000 25,800 84,400 60,300 1,34,800 6,10,100 -1,74,700 -1,00,000 1,00,000 -3,35,400 15,86,813 -4,25,389 -3,00,000 -8,61,424 5,65,600 3,46,400 93,320 52,260 1,34,800 20,37,505 -6,00,089 -3,00,000 -8,61,049 -2,74,142 20,37,505 2,74,142 -15,86,813 -6,10,100

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