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On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $372,000. 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 $372,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $219,900. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $248,000. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $79,300 and an unrecorded customer list (15-year remaining life) assessed at a $54,900 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 $127,800 $159,750 $53,250
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:

McIlroy, Inc. Stinson, Inc.
Sales $ (736,000 ) $ (368,000 )
Cost of goods sold 483,700 224,800
Operating expenses 198,540 76,600
Equity in earnings in Stinson (34,256 ) 0
Net income $ (88,016 ) $ (66,600 )
Retained earnings, 1/1/18 $ (780,200 ) $ (283,000 )
Net income (88,016 ) (66,600 )
Dividends declared 48,300 19,000
Retained earnings, 12/31/18 $ (819,916 ) $ (330,600 )
Cash and receivables $ 279,400 $ 150,500
Inventory 262,400 131,200
Investment in Stinson 415,112 0
Buildings (net) 339,000 205,600
Equipment (net) 242,000 89,400
Patents (net) 0 24,000
Total assets $ 1,537,912 $ 600,700
Liabilities $ (417,996 ) $ (170,100 )
Common stock (300,000 ) (100,000 )
Retained earnings, 12/31/18 (819,916 ) (330,600 )
Total liabilities and equities $ (1,537,912 ) $ (600,700 )

  1. Show how McIlroy determined the $415,112 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinsons income.

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

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