Question

On January 1, 2014, 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 $220,000. 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 $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, 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)
2014	120,000	150,000	50,000
2015	112,000	160,000	40,000

The individual financial statements for these two companies as of December 31, 2015, and the year then ended follow:

	McIlroy, Inc.		Stinson, Inc.
Sales	$	(700,000)	$	(335,000)
Cost of goods sold		460,000		205,000
Operating expenses		188,000		70,000
Equity earnings in Stinson		(28,000)		0
Net income	$	(80,000)	$	(60,000)
Retained earnings, 1/1/15	$	(695,000)	$	(280,000)
Net income (above)		(80,000)		(60,000)
Dividends declared		45,000		15,000
Retained earnings, 12/31/15	$	(730,000)	$	(325,000)
Cash and receivables	$	248,000	$	148,000
Inventory		233,000		129,000
Investment in Stinson		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, 12/31/15		(730,000)		(325,000)
Total liabilities and equities	$	(1,420,000)	$	(585,000)

1. Show how the the following consolidated balances for 2015 are calculated: a)Consolidated cost of goods sold b)Consolidated inventory c)Consolidated patent 2. What is the consolidated balance for goodwill on January 1,2014?

Answer 1

            Acquisition-date fair value allocation and excess amortizations

      a.   Consideration transferred ............................. $372,000

            Noncontrolling interest fair value..................     248,000

            Subsidiary fair value at acquisition-date .... $620,000

            Acquisition-date book value........................... (320,000)

            Fair value in excess of book value ............... $300,000                 Annual Excess

                  Excess fair value assignments................                      Life        Amortizations

                  to patents.......................................................       70,000   10 yrs.          $7,000

                  to customer list ............................................       45,000   15 yrs.          3,000

                  to goodwill .................................................... $185,000   indefinite         -0-

                                                                                                                                      $10,000

      Determination of Investment in Stinson account balance

      Consideration transferred .........................................................                                  $372,000

            Increase in Stinson’s retained earnings 1/1/14 to 1/1/15

            [(280,000 – 220,000) × 60%].................................................                 $36,000                   

            Excess fair value amortization × 60%................................                    (6,000)                      

            2014 ending inventory profit deferral (100%)...................                  (10,000)      20,000

            McIlroy’s equity earnings in Stinson for 2015*................                                      28,000

            Stinson 2015 dividends paid to McIlroy............................                                       (9,000)

      Investment account balance 12/31/15.....................................                                  $411,000

     

      * Stinson’s 2015 income..........................................................                 $60,000

            Excess fair value amortization............................................                  (10,000)

            Adjusted net income..............................................................                 $50,000

            McIlroy’s percentage ownership........................................                        60%

            McIlroy’s share of Stinson’s adjusted net income.........                 $30,000

            2014 intra-entity inventory profit recognized...................                   10,000

            2015 intra-entity inventory profit deferred........................                  (12,000)

            McIlroy’ equity earnings in Stinson....................................                 $28,000

            Intra-entity profits (downstream)                                        2014              2015

            Intra-entity transfers remaining in inventory                50,000          40,000

            Gross profit rate**                                                                        20%               30%

                                                                                                           $10,000        $12,000

        **(150,000 – 120,000) ÷ 150,000 = 20%

          (160,000 – 112,000) ÷ 160,000 = 30%

b.                                               McIlroy      Stinson                    Adj. & Elim.             NCI    Consolidated

Sales                                        (700,000)     (335,000)     (TI)160,000                                            (875,000)

Cost of goods sold                    460,000       205,000      (G) 12,000    (*G) 10,000                        507,000

                                                                                                        (TI) 160,000                                  

Operating expenses                   188,000         70,000      (E) 10,000                                             268,000

Income of Stinson                     (28,000)                          (I)   28,000                                                   -0-     

Separate company income          (80,000)    (60,000)                                                                            

Consolidated net income                                                                                                           (100,000)

to noncontrolling interest                                                                                      (20,000)       20,000

to parent                                                                                                                                 (80,000)

                                                                                                                                                           

Retained earnings, 1/1              (695,000)     (280,000)     (S) 280,000                                            (695,000)

Net income (above)                     (80,000)      (60,000)                                                                  (80,000)

Dividends paid                             45,000         15,000                            (D)   9,000         6,000        45,000

Retained earnings, 12/31           (730,000)     (325,000)                                                                 (730,000)

                                                                                                                                                           

Cash and receivables                 248,000       148,000                                                                   396,000

Inventory                                    233,000       129,000                          (G) 12,000                        350,000

Investment in Stinson                411,000              -0-      (D)   9,000    (S) 228,000                                -0-

                                                                                    (*G) 10,000     (A)174,000                                  

                                                                                                          (I)   28,000                                  

Buildings (net)                           308,000       202,000                                                                   510,000

Equipment (net)                        220,000        86,000                                                                   306,000

Patents (net)                                        -0-       20,000        (A) 63,000       (E) 7,000                         76,000

Customer list                                                                  (A) 42,000       (E) 3,000                         39,000

Goodwill                                                                         (A)185,000                                            185,000

Total assets                             1,420,000      585,000                                                                1,862,000

Liabilities                                 (390,000)   (160,000)                                                                 (550,000)

Common stock                          (300,000)   (100,000)     (S) 100,000                                           (300,000)

Noncontrolling interest 1/1                                                                 (S) 152,000                                  

                                                                                                          (A)116,000    (268,000)                

Noncontrolling interest 12/31                                                                                   282,000      (282,000)

Retained earnings, 12/31          (730,000)     (325,000)                                                               (730,000)

Total liabilities and equities   (1,420,000)     (585,000)          899,000          899,000                  (1,862,000)

Note: consolidated balnaces are in workshhet final balances, 2014 goodwill is calculated in 1st part.