Question

On January 1, 2020, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $384,600. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $227,300. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $256,400. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $77,800 and an unrecorded customer list (15-year remaining life) assessed at a $53,700 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)
2020	$126,900	$158,625	$52,875
2021	113,100	150,800	37,700

The individual financial statements for these two companies as of December 31, 2021, and the year then ended follow:

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(730,000	)		$	(366,000	)
Cost of goods sold		479,800				223,600
Operating expenses		196,510				76,200
Equity in earnings in Stinson		(34,054	)			0
Net income	$	(87,744	)		$	(66,200	)
Retained earnings, 1/1/21	$	(771,200	)		$	(282,600	)
Net income		(87,744	)			(66,200	)
Dividends declared		47,700				18,300
Retained earnings, 12/31/21	$	(811,244	)		$	(330,500	)
Cash and receivables	$	276,200			$	150,500
Inventory		259,400				131,200
Investment in Stinson		423,463				0
Buildings (net)		337,000				205,000
Equipment (net)		240,600				88,800
Patents (net)		0				23,200
Total assets	$	1,536,663			$	598,700
Liabilities	$	(425,419	)		$	(168,200	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/21		(811,244	)			(330,500	)
Total liabilities and equities	$	(1,536,663	)		$	(598,700	)

(Note: Parentheses indicate a credit balance.)

1. Show how McIlroy determined the $423,463 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, 2021.

Answer 1

ANSWER

Ques 1
Consideration transferred	$         384,600
Fair value-NCI	$         256,400
Book value of subsidiary	$      (327,300)
Fair value in excess of book value:	$         313,700
		Life	Annual Amortization
Cutomer List(15 years life)	$           53,700	15	3580
Patent (10 year life)	$           77,800	10	7780
Goodwill	$         182,200	Indfinite
			11360
Determination of invenstment
Consideration transferred		$      384,600
Increase in retained earnings(282600-227300)*60%	33180
Excess fair value amortization	-6816
2016 ending inventory profit deferral	-10575	15789
Equity earnings-2017		34054
dividends declared		-10980
		$      423,463
2017 cunningham income	$           66,200
Excess fair value amoertization	-11360
Adjusted Net Income	54840
Ownership	60%
Share in net income	32904
2017 intra entity transfers profit recognised	10575
2018 intra entity transfers profit deferred	-9425
Equity earnings	34054
Intra entity profits(downstream)	2017	2018
Intera entity transfers remaining inventory	52875	37700
Gross proift rate	20%	25%
	10575	9425

Items	George	Cullingham	Debit	Credit	NCI	Consolidated
Sales	$           (730,000)	$      (366,000)	(TI)	$      150,800				$           (945,200)
Cost of goods sold	$              479,800	$        223,600	(G)	$           9,425	(TI)	$        150,800		$             551,450
					(*G)	$          10,575
Operating expenses	$              196,510	$          76,200	(E)	$         11,360				$             284,070
Equity earnings	$              (34,054)		(I)	$         34,054				$                         -
Separate company Net income	$              (87,744)	$        (66,200)
Consolidated net income								$           (109,680)
To NCI							-21136	21136
To MCLLORY								$             (88,544)
Retained earnings 1/1	$           (771,200)	$      (282,600)	(S)	$      282,600				$           (771,200)
Net Income (Above)	$              (87,744)	$        (66,200)						$             (88,544)
Dividends declared	$                47,700	$          18,300			(D)	10980	7320	$               47,700
Retained earnings 12/31	$           (811,244)	$      (330,500)						$           (812,044)
Cash and receivables	$              276,200	$        150,500						$             426,700
Inventory	$              259,400	$        131,200			(G)	$             9,425		$             381,175
Investment in cullingham	$              423,463		(D)	$         10,980	(S)	$        229,560
			(*G)	$         10,575	(A)	$        181,404
					(I)	$          34,054
Buildings	$              337,000	$        205,000						$             542,000
Equipments	$              240,600	$          88,800						$             329,400
Patents		$          23,200	(A)	$         74,220	(E)	7780		$               89,640
Customer List			(A)	$         45,920	(E)	3580		$               42,340
Goodwill			(A)	$      182,200				$             182,200
Total assets	$          1,536,663	$        598,700						$         1,993,455
Liabilities	$           (425,419)	$      (168,200)						$           (593,619)
Common stock	$           (300,000)	$      (100,000)	(S)	$      100,000				$           (300,000)
Non controlling interest 1/1					(S)	$        153,040
					(A)	$        120,936	-273976
Non controlling interest 12/31							287792	-287792
Retained earnings 12/31	$           (811,244)	$      (330,500)						$           (812,044)
Total liabilities and equity	$        (1,536,663)	$      (598,700)		$      912,134		$        912,134		$       (1,993,455)

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