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On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of...

On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $351,600. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $207,900. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $234,400. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $88,600 and an unrecorded customer list (15-year remaining life) assessed at a $64,500 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 $138,900 $173,625 $57,875
2018 113,400 151,200 37,800

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

McIlroy, Inc. Stinson, Inc.
Sales $ (765,000 ) $ (406,000 )
Cost of goods sold 502,800 247,600
Operating expenses 203,285 84,200
Equity in earnings in Stinson (38,749 ) 0
Net income $ (97,664 ) $ (74,200 )
Retained earnings, 1/1/18 $ (850,200 ) $ (286,600 )
Net income (97,664 ) (74,200 )
Dividends declared 52,000 21,500
Retained earnings, 12/31/18 $ (895,864 ) $ (339,300 )
Cash and receivables $ 304,600 $ 154,500
Inventory 286,200 134,500
Investment in Stinson 405,198 0
Buildings (net) 377,000 208,800
Equipment (net) 269,000 92,300
Patents (net) 0 27,300
Total assets $ 1,641,998 $ 617,400
Liabilities $ (446,134 ) $ (178,100 )
Common stock (300,000 ) (100,000 )
Retained earnings, 12/31/18 (895,864 ) (339,300 )
Total liabilities and equities $ (1,641,998 ) $ (617,400 )

Show how McIlroy determined the $405,198 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

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

Show how McIlroy determined the $405,198 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

Consideration transferred $351,600
Increase in Stinson’s retained earnings 1/1/17 to 1/1/18
Excess fair value amortization
2017 ending inventory profit deferral 0
McIlroy’s equity in earnings of Stinson for 2018
Stinson 2018 dividends declared to McIlroy
Investment account balance 12/31/18 $351,600

repare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the NCI and Consolidated Totals columns should be entered with a minus sign.)

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MCILROY, INC., AND STINSON, INC.
Consolidation Worksheet
For Year Ending December 31, 2018
Consolidation Entries
Accounts McIlroy Stinson Debit Credit NCI Consolidated Totals
Sales $(765,000) $(406,000)
Cost of goods sold 502,800 247,600
Operating expenses 203,285 84,200
Equity in earnings of Stinson (38,749) 0
Separate company net income (97,664) (74,200)
Consolidated net income $0
To noncontrolling interest
To McIlroy, Inc. 0
Retained earnings, 1/1 (850,200) (286,600)
Net income (97,664) (74,200)
Dividends declared 52,000 21,500
Retained earnings, 12/31 $(895,864) $(339,300) $0
Cash and receivables $304,600 $154,500
Inventory 286,200 134,500
Investment in Stinson 405,198 0
Buildings (net) 377,000 208,800
Equipment (net) 269,000 92,300
Patents (net) 0 27,300
Customer list
Goodwill
Total assets $1,641,998 $617,400 $0
Liabilities (446,134) (178,100)
Common stock (300,000) (100,000)
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Retained earnings, 12/31 (895,864) (339,300)
Total liabilities and equities $(1,641,998) $(617,400) $0 $0 $0

Solutions

Expert Solution

            Acquisition-date fair value allocation and excess amortizations

      a.   Consideration transferred ............................. $351,600

            Noncontrolling interest fair value..................     234,400

            Subsidiary fair value at acquisition-date .... $586,000

            Acquisition-date book value........................... (307,900)

            Fair value in excess of book value ............... $278,100                 Annual Excess

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

                  to patents.......................................................       88,600   10 yrs.          $8,860

                  to customer list ............................................       64,500   15 yrs.          4,300

                  to goodwill .................................................... $125,000   indefinite         -0-

                                                                                                                                      $13,160

      Determination of Investment in Stinson account balance

      Consideration transferred .........................................................                                  $351,600

            Increase in Stinson’s retained earnings 1/1/17 to 1/1/18

            [(286,600 – 207,900) × 60%].................................................                 $47,220                   

            Excess fair value amortization × 60%................................                    (7,896)                      

            2017 ending inventory profit deferral (100%)...................                  (11,575)      27,749

            McIlroy’s equity earnings in Stinson for 2018*................                                      38,749

            Stinson 2018 dividends paid to McIlroy............................                                     (12,900)

      Investment account balance 12/31/13.....................................                                  $405,198

     

      * Stinson’s 2018 income..........................................................                 $74,200

            Excess fair value amortization............................................                  (13,160)

            Adjusted net income..............................................................                 $61,040

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

            McIlroy’s share of Stinson’s adjusted net income.........                 $36,624

            2017 intra-entity inventory profit recognized...................                   11,575

            2018 intra-entity inventory profit deferred........................                    (9,450)

            McIlroy’ equity earnings in Stinson....................................                 $38,749

            Intra-entity profits (downstream)                                        2017              2018

            Intra-entity transfers remaining in inventory                57,875          37,800

            Gross profit rate**                                                                        20%               25%

                                                                                                           $11,575          $9,450

        **(173,625 – 138,900) ÷ 173,625 = 20%

                      (151,200 – 113,400) ÷ 151,200 = 25%

b.                                               McIlroy      Stinson                    Adj. & Elim.             NCI    Consolidated

Sales                                        (765,000)     (406,000)     (TI)151,200                                         (1,019,800)

Cost of goods sold                    502,800       247,600        (G) 9,450    (*G) 11,575                        597,075

                                                                                                        (TI) 151,200                                  

Operating expenses                   203,285         84,200      (E) 13,160                                             300,645

Income of Stinson                     (38,749)                          (I)   38,749                                                   -0-     

Separate company income          (97,664)    (74,200)                                                                            

Consolidated net income                                                                                                           (122,080)

to noncontrolling interest                                                                                      (24,416)       24,416

to parent                                                                                                                                 (97,664)

                                                                                                                                                           

Retained earnings, 1/1              (850,200)     (286,600)     (S) 286,600                                            (850,200)

Net income (above)                     (97,664)      (74,200)                                                                  (97,664)

Dividends paid                             52,000         21,500                          (D)   12,900         8,600        52,000

Retained earnings, 12/31           (895,864)     (339,300)                                                                 (895,864)

                                                                                                                                                           

Cash and receivables                 304,600       154,500                                                                   459,100

Inventory                                    286,200       134,500                            (G) 9,450                        411,250

Investment in Stinson                405,198              -0-     (D)   12,900    (S) 231,960                                -0-

                                                                                    (*G) 11,575     (A)158,964                                  

                                                                                                          (I)   38,749                                  

Buildings (net)                           377,000       208,800                                                                   585,800

Equipment (net)                        269,000        92,300                                                                   361,300

Patents (net)                                        -0-       27,300        (A) 79,740       (E) 8,860                         98,180

Customer list                                                                  (A) 60,200       (E) 4,300                         55,900

Goodwill                                                                         (A)125,000                                            125,000

Total assets                             1,641,998      617,400                                                                2,096,530

Liabilities                                 (446,134)   (178,100)                                                                 (624,234)

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

Noncontrolling interest 1/1                                                                 (S) 154,640                                  

                                                                                                          (A)105,976    (260,616)                

Noncontrolling interest 12/31                                                                                   276,432      (276,432)

Retained earnings, 12/31          (895,964)     (339,300)                                                               (895,864)

Total liabilities and equities   (1,641,998)     (617,400)          899,000          899,000                  (2,096,530)


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