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On January 1, 2020, McIlroy, Inc., acquired a 60 percent interest in the common stock of...

On January 1, 2020, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $334,800. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $197,900. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $223,200. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $86,200 and an unrecorded customer list (15-year remaining life) assessed at a $62,400 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 $137,700 $172,125 $57,375
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 $ (757,000 ) $ (398,000 )
Cost of goods sold 497,500 242,800
Operating expenses 201,705 82,600
Equity in earnings in Stinson (37,917 ) 0
Net income $ (95,712 ) $ (72,600 )
Retained earnings, 1/1/21 $ (838,200 ) $ (285,800 )
Net income (95,712 ) (72,600 )
Dividends declared 50,900 21,100
Retained earnings, 12/31/21 $ (883,012 ) $ (337,300 )
Cash and receivables $ 300,500 $ 153,600
Inventory 282,300 133,800
Investment in Stinson 393,654 0
Buildings (net) 366,000 208,300
Equipment (net) 261,100 91,800
Patents (net) 0 26,600
Total assets $ 1,603,554 $ 614,100
Liabilities $ (420,542 ) $ (176,800 )
Common stock (300,000 ) (100,000 )
Retained earnings, 12/31/21 (883,012 ) (337,300 )
Total liabilities and equities $ (1,603,554 ) $ (614,100 )

(Note: Parentheses indicate a credit balance.)

  1. Show how McIlroy determined the $393,654 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.

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