Question
On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $340,200. Stinson's book value on that
On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $340,200. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $201,100. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $226,800. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $76,900 and an unrecorded customer list (15-year remaining life) assessed at a $52,800 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 | $126,300 | $157,875 | $52,625 |
2018 | 112,500 | 150,000 | 37,500 |
The individual financial statements for these two companies as of December 31, 2018, and the year then ended follow:
McIlroy, Inc. | Stinson, Inc. | ||||||
Sales | $ | (726,000) | $ | (362,000) | |||
Cost of goods sold | 477,200 | 221,200 | |||||
Operating expenses | 195,760 | 75,400 | |||||
Equity in earnings in Stinson | (33,664) | 0 | |||||
Net income | $ | (86,704) | $ | (65,400) | |||
Retained earnings, 1/1/18 | $ | (770,600) | $ | (282,200) | |||
Net income | (86,704) | (65,4000 | |||||
Dividends declared | 47,500 | 17,900 | |||||
Retained earnings, 12/31/18 | $ | (809,804) | $ | (329,700) | |||
Cash and receivables | $ | 276,000 | $ | 150,100 | |||
Inventory | 259,200 | 130,900 | |||||
Investment in Stinson | 394,533 | 0 | |||||
Buildings (net) | 334,000 | 204,600 | |||||
Equipment (net) | 238,500 | 88,400 | |||||
Patents (net) | 0 | 22,800 | |||||
Total assets | $ | 1,502,233 | $ | 596,800 | |||
Liabilities | $ | (392,429) | $ | (167,100) | |||
Common stock | (300,000) | (100,000) | |||||
Retained earnings, 12/31/18 | (809,804) | (329,700) | |||||
Total liabilities and equities | $ | (1,502,233) | $ | (596,800) | |||
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Show how McIlroy determined the $394,533 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinsons income.
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Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018.
Consideration transferred Increase in Stinson's retained earnings 1/1/17 to 1/1/18 Excess fair value amortization 2017 ending inventory profit deferral Mcllroy's equity in earnings of Stinson for 2018 Stinson 2015 dividends declared to Mcllroy Investment account balance 12/31/18 0 Accounts NCI Consolidated Totals Cor MCILROY, INC., AND STINSON, INC. Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Mcllroy Stinson Debit Credit (726,000) $ (362,000) 477,200 221,200 195,760 75,400 (33,664) (86,704) (65,400) Sales $ _ Cost of goods sold Operating expenses Equity in earnings of Stinson Separate company net income Consolidated net income To noncontrolling interest To Mcllroy, Inc. Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 (770,600) (86,704) 47,500 (809,804) (282,200) (65,400)| 17,900 (329,700) $ $ 276,000 259,200 150,100 130,900 394,533 0 01 334,000 238,500 Cash and receivables Inventory Investment in Stinson Buildings (net) Equipment (net) Patents (net) Customer list Goodwill Total assets Liabilities 204,600 88,400 22,800 $ $ $ 0 1,502,233 (392,429) (300,000) 596,800 (167,100) (100,000) Common stock Noncontrolling interest 1/1 Noncontrolling interest 12/31 Retained earnings, 12/31 Total liabilities and equities (809,804) (1,502,233) $ (329,700) (596,800) $ $ 0 $
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