On January 1, 2010, Woods, Inc., acquired a 60 percent interest in the common stock of Scott, Inc., for $672,000. Scott’s book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Also, the Junuary 1, 2010, fair value on the 40 percent noncontrolling interest was $248,000. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company’s accounting records by $70,000 and an unrecorded customer list (15-year remaining life) assessed at a $45,000 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Since acquisition, Woods has applied the equity method to its Investment in Scott account and no goodwill impairment has occurred.
Intra-entity inventory sales between the two companies have been made as follows:
Year | Cost to Woods | Transfer Price to Scott | Ending Balance (at transfer price) |
2010 | 120,000 | 150,000 | 50,000 |
2011 | 112,000 | 160,000 | 40,000 |
The individual financial statements for these two companies as of December 31, 2011, and the year then ended follow:
| Woods, Inc. | Scott, Inc. |
Sales | $ (700,000) | $(335,000) |
Cost of goods sold | 460,000 | 205,000 |
Operating expenses | 188,000 | 70,000 |
Equity earnings in Scott | (28,000) | -0- |
Net income | $ (80,000) | $ (60,000) |
Retained earnings, 1/1/11 | $ (695,000) | $(280,000) |
Net income (above) | (80,000) | (60,000) |
Dividends paid | 45,000 | 15,000 |
Retained earnings, 12/31/11 | $ (730,000) | $(325,000) |
| Woods, Inc. | Scott, Inc. |
Cash and receivables | $ 248,000 | $ 148,000 |
Inventory | 233,000 | 129,000 |
Investment in Scott | 411,000 | -0- |
Buildings (net) | 308,000 | 202,000 |
Equipment (net) | 220,000 | 86,000 |
Patents (net) | -0- | 20,000 |
Total assets | $ 1,420,000 | $ 585,000 |
Liabilities | $ (390,000) | $(160,000) |
Common stock | (300,000) | (100,000) |
Retained earnings,12/31/11 | (730,000) | (325,000) |
Total liabilities and equities | $(1,420,000) | $(585,000) |
a. Show how Woods determined the $411,000 Investment in Scott account balance. Assume that Woods defers 100 percent of downstream intra-entity profits against its share of Scott’s income.
b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2011.
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