Question

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $372,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $219,900. Also, the acquisition-date fair value of 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 $79,300 and an unrecorded customer list (15-year remaining life) assessed at a $54,900 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	$127,800	$159,750	$53,250
2018	112,800	150,400	37,600

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

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(736,000	)		$	(368,000	)
Cost of goods sold		483,700				224,800
Operating expenses		198,540				76,600
Equity in earnings in Stinson		(34,256	)			0
Net income	$	(88,016	)		$	(66,600	)
Retained earnings, 1/1/18	$	(780,200	)		$	(283,000	)
Net income		(88,016	)			(66,600	)
Dividends declared		48,300				19,000
Retained earnings, 12/31/18	$	(819,916	)		$	(330,600	)
Cash and receivables	$	279,400			$	150,500
Inventory		262,400				131,200
Investment in Stinson		415,112				0
Buildings (net)		339,000				205,600
Equipment (net)		242,000				89,400
Patents (net)		0				24,000
Total assets	$	1,537,912			$	600,700
Liabilities	$	(417,996	)		$	(170,100	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/18		(819,916	)			(330,600	)
Total liabilities and equities	$	(1,537,912	)		$	(600,700	)

1. Show how McIlroy determined the $415,112 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

2. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018.

Answer 1

Part A

Determination of Investment in Stinson account balance

Consideration transferred		372000
Increase in Stinson's retained earnings	37860
Excess fair value amortization	(6954)
2017 ending inventory profit deferral	(10650)	20256
McIlroy's equity earnings in Stinson for 2018		34256
Stinson 2018 dividends declared to McIlroy		(11400)
Investment account balance 12/31/18		415112

(283000-219900)*60% = 37860

11590*60% = 6954

19000*60% =11400

Acquisition-date fair value allocation and excess amortizations

Consideration transferred	372000
Noncontrolling interest fair value	248000
Subsidiary fair value at acquisition-date	620000
Acquisition-date book value	319900
Fair value in excess of book value	300100
		Life in Years	Annual Excess Amortizations
Excess fair value assignments
to patents	79300	10	7930
to customer list	54900	15	3660
to goodwill	165900	indefinite	-
			11590

100000+219900 = 319900

235600-83200-58800 = 93600

	2017	2018
Intra-entity profits (downstream)	53250	37600
Intra-entity transfers remaining in inventory	20%	25%
Gross profit rate	10650	9400

1-(127800/159750) = 20%

1-(112800/150400) = 25%

Stinson's 2018 income	66600
Excess fair value amortization	(11590)
Adjusted net income	57160
McIlroy's percentage ownership	60%
McIlroy's share of Stinson's adjusted net income	33006
2017 Intra-entity inventory profit recognized	10650
2018 Intra-entity inventory profit deferred	(9400)
McIlroy's equity earnings in Stinson	$34256

Part B

Consolidation Worksheet

Year Ending December 31, 2018

			Adjustments & Eliminations
	McIlroy	Stinson	Debit	Credit	Noncontrolling interest	Consolidate Totals
Sales	(736000)	(368000)	150400			(953600)
Cost of goods sold	483700	224800	9400	161050		556850
Operating expenses	198540	76600	11590			286730
Equity in earnings of Stinson	(34256)	0	34256			0
Separate company net income	(88016)	(66600)
Consolidated net income						(110020)
To noncontrolling interest					(22004)	22004
To McIlroy, Inc.						(88016)
Retained earnings, 1/1	(780200)	(283000)	283000			(780200)
Net income	(88016)	(66600)				(88016)
Dividends declared	48300	19000		11400	7600	48300
Retained earnings, 12/31	(819916)	(330600)				(819916)
Cash and receivables	279400	150500				429900
Inventory	262400	131200		9400		384200
Investment in Stinson	415112	0	11400	426512		0
Buildings (net)	339000	205600				544600
Equipment (net)	242000	89400				331400
Patents (net)	0	24000	79300	7930		95370
Customer list			54900	3660		51240
Goodwill			165900			165900
Total assets	1537912	600700				2002610
Liabilities	(417996)	(170100)				(588096)
Common stock	(300000)	(100000)	100000			(300000)
Noncontrolling interest 1/1				280194	(280194)
Noncontrolling interest 12/31					(294598)	294598
Retained earnings 12/31	(819916)	(330600)				(819916)
Total liabilities and equity	(1537912)	(600700)	900146	900146		(1931335)