Question
In January 1, 2019, Strolle Company acquired an 70% interest in Hailey Company for a purchase price that was $500,000 over the book value of
In January 1, 2019, Strolle Company acquired an 70% interest in Hailey Company for a purchase price that was $500,000 over the book value of Haileys Stockholders Equity on the acquisition date. Spring uses the equity method to account for its investment in Hailey. Strolle assigned the acquisition-date AAP as follows:
| AAP Items | Initial Fair Value | Useful Life (years) |
| Patent | 350,000 | 10 |
| Goodwill | 150,000 | Indefinite |
|
| $500,000 |
|
Hailey sells inventory to Strolle (upstream) which includes that inventory in products that it (Strolle), ultimately, sells to customers outside of the controlled group. You have compiled the following data as of 2024 and 2025:
|
| 2024 | 2025 |
| Transfer price for inventory sale | $305,500 | $500,000 |
| Cost of goods sold | -259,675 | -440,000 |
| Gross profit | $45,825 | 60,000 |
| % inventory remaining | 50% | 40% |
| Gross profit deferred | $22,913 | $24,000 |
|
|
|
|
| EOY Receivable/Payable | $42,000 | $18,000 |
The inventory not remaining at the end of the year has been sold outside of the controlled group.
Strolle and Hailey report the following financial statements at December 31, 2025:
| Income Statement | ||
|
| Strolle | Hailey |
| Sales | $4,500,000 | $750,000 |
| Cost of goods sold | -3,825,000 | (660,000) |
| Gross Profit | 675,000 | 90,000 |
| Income (loss) from subsidiary | 13,939 |
|
| Operating expenses | -323,000 | -34,000 |
| Net income | $365,939 | $56,000 |
|
|
|
|
| Statement of Retained Earnings | ||||||
|
| Strolle | Hailey | ||||
| BOY Retained Earnings | $4,465,000 | $440,000 | ||||
| Net income | 365,939 | 56,000 | ||||
| Dividends | -105,400 | -10,000 | ||||
| EOY Retained Earnings | $4,725,539 | $486,000 | ||||
| Balance Sheet | ||||||
|
| Strolle | Hailey | ||||
| Assets: |
|
| ||||
| Cash | $420,000 | $425,000 | ||||
| Accounts receivable | 304,000 | 545,000 | ||||
| Inventory | 654,000 | 425,000 | ||||
| Equity Investment | 782,600 |
| ||||
| PPE, net | 6,723,539 | 420,000 | ||||
|
| $8,884,139 | $1,815,000 | ||||
|
|
|
| ||||
| Liabilities and Stockholders Equity: |
|
| ||||
| Current Liabilities | $340,000 | $175,000 | ||||
| Long-term Liabilities | 1,750,000 | 753,000 | ||||
| Common Stock | 853,600 | 92,100 | ||||
| APIC | 1,215,000 | 308,900 | ||||
| Retained Earnings | 4,725,539 | 486,000 | ||||
|
| $8,884,139 | $1,815,000 | ||||
|
|
|
| ||||
Required:
a. Compute the EOY noncontrolling interest equity balance.
b. Prepare the consolidation spreadsheet as of December 31, 2025:
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