Question

On January 1, 2020, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $391,800. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $231,600. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $261,200. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $85,600 and an unrecorded customer list (15-year remaining life) assessed at a $61,800 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	$137,100	$171,375	$57,125
2021	113,400	151,200	37,800

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

	McIlroy, Inc.				Stinson, Inc.
Sales	$	(755,000	)		$	(395,000	)
Cost of goods sold		496,200				241,000
Operating expenses		201,455				82,000
Equity in earnings in Stinson		(37,567	)			0
Net income	$	(94,912	)		$	(72,000	)
Retained earnings, 1/1/21	$	(824,900	)		$	(285,700	)
Net income		(94,912	)			(72,000	)
Dividends declared		50,800				20,800
Retained earnings, 12/31/21	$	(869,012	)		$	(336,900	)
Cash and receivables	$	295,500			$	153,400
Inventory		277,600				133,600
Investment in Stinson		430,314				0
Buildings (net)		364,000				208,000
Equipment (net)		259,700				91,500
Patents (net)		0				26,400
Total assets	$	1,627,114			$	612,900
Liabilities	$	(458,102	)		$	(176,000	)
Common stock		(300,000	)			(100,000	)
Retained earnings, 12/31/21		(869,012	)			(336,900	)
Total liabilities and equities	$	(1,627,114	)		$	(612,900	)

(Note: Parentheses indicate a credit balance.)

1. Show how McIlroy determined the $430,314 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