Question

On January 1, 2017, Mcllroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $325,200. Stinson’s book value on that date consisted of common stock of $100,000 and retained earnings of $192,300. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $216,800. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company’s accounting record by $74,200 and an unrecorded customer list (15-year remaining life) assessed at a $50,100 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Since acquisition, Mcllroy 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 Mcllroy	Transfer Price to Stinson	Ending Balance (at transfer price)
2017	$124,200	$155,250	$51,750
2018	112,800	150,400	37,600

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

	Mcllroy, Inc.	Stinson, Inc.
Sales	$ (715,000)	$ (353,000)
Cost of goods sold	469,900	215,800
Operating expenses	193,210	73, 600
Equity in earnings in Stinson	(32,654)	0
Net income	$ (84,544)	$(63,600)
Retained earnings, 1/1/18	$ (754,700)	$ (281,300)
Net income	(84,544)	(63,600)
Dividends declared	46,500	16,500
Retained earnings, 12/31/18	$ (792,744)	$ (328,400)
Cash and receivables	$ 270,200	$149,600
Inventory	253,800	130,400
Investment in Stinson	384,548	0
Buildings (net)	325,000	203,600
Equipment (net)	232,100	87,000
Patents (net)	0	21,700
Total assets	$1,465,648	$ 592,300
Liabilities	$ (372,904)	$ (163,900)
Common stock	(300,000)	(100,000)
Retained earnings, 12/31/18	(792,744)	(328,400)
Total liabilities and equities	$ (1,465,648)	$ (592,300)

a. Show hos Mcllroy determined the $384,548 Investment in Stinson account balance. Assume that Mcllroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.

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

Answer 1