Question
On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $312,000. 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 $312,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $184,400. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $208,000. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $83,200 and an unrecorded customer list (15-year remaining life) assessed at a $58,800 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 | $132,900 | $166,125 | $55,375 |
2018 | 113,100 | 150,800 | 37,700 |
The individual financial statements for these two companies as of December 31, 2018, and the year then ended follow:
McIlroy, Inc. | Stinson, Inc. | ||||||
Sales | $ | (747,000 | ) | $ | (382,000 | ) | |
Cost of goods sold | 490,900 | 233,200 | |||||
Operating expenses | 200,590 | 79,400 | |||||
Equity in earnings in Stinson | (35,946 | ) | 0 | ||||
Net income | $ | (91,456 | ) | $ | (69,400 | ) | |
Retained earnings, 1/1/18 | $ | (814,500 | ) | $ | (284,300 | ) | |
Net income | (91,456 | ) | (69,400 | ) | |||
Dividends declared | 49,700 | 20,000 | |||||
Retained earnings, 12/31/18 | $ | (856,256 | ) | $ | (333,700 | ) | |
Cash and receivables | $ | 291,900 | $ | 151,900 | |||
Inventory | 274,200 | 132,400 | |||||
Investment in Stinson | 377,467 | 0 | |||||
Buildings (net) | 353,000 | 207,200 | |||||
Equipment (net) | 251,900 | 90,600 | |||||
Patents (net) | 0 | 25,300 | |||||
Total assets | $ | 1,548,467 | $ | 607,400 | |||
Liabilities | $ | (392,211 | ) | $ | (173,700 | ) | |
Common stock | (300,000 | ) | (100,000 | ) | |||
Retained earnings, 12/31/18 | (856,256 | ) | (333,700 | ) | |||
Total liabilities and equities | $ | (1,548,467 | ) | $ | (607,400 | ) | |
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Show how McIlroy determined the $377,467 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinsons income.
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Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018
Consolidation EntriesAccountsMcIlroyStinsonDebitCreditNCIConsolidated TotalsSales$(747,000)$(382,000)Cost of goods sold490,900233,200Operating expenses200,59079,400Equity in earnings of Stinson(35,946)0Separate company net income(91,456)(69,400)Consolidated net income$0To noncontrolling interestTo McIlroy, Inc.0Retained earnings, 1/1(814,500)(284,300)Net income(91,456)(69,400)Dividends declared49,70020,000Retained earnings, 12/31$(856,256)$(333,700)$0Cash and receivables$291,900$151,900Inventory274,200132,400Investment in Stinson377,4670Buildings (net)353,000207,200Equipment (net)251,90090,600Patents (net)025,300Customer listGoodwillTotal assets$1,548,467$607,400$0Liabilities(392,211)(173,700)Common stock(300,000)(100,000)Noncontrolling interest 1/1Noncontrolling interest 12/31Retained earnings, 12/31(856,256)(333,700)Total liabilities and equities$(1,548,467)$(607,400)$0$0$0
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