Problem Four (14 Points)

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: