In: Accounting
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.
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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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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)