On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock...
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On January 1, 2017, McIlroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $412,800. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $244,000. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $275,200. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $85,000 and an unrecorded customer list (15-year remaining life) assessed at a $61,200 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
$135,900
$169,875
$56,625
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
$
(753,000
)
$
(391,000
)
Cost of goods sold
494,900
238,600
Operating expenses
201,405
81,200
Equity in earnings in Stinson
(37,097
)
0
Net income
$
(93,792
)
$
(71,200
)
Retained earnings, 1/1/18
$
(815,700
)
$
(285,400
)
Net income
(93,792
)
(71,200
)
Dividends declared
50,400
20,600
Retained earnings, 12/31/18
$
(859,092
)
$
(336,000
)
Cash and receivables
$
292,100
$
153,000
Inventory
274,400
133,300
Investment in Stinson
443,504
0
Buildings (net)
360,000
207,800
Equipment (net)
256,800
91,100
Patents (net)
0
26,100
Total assets
$
1,626,804
$
611,300
Liabilities
$
(467,712
)
$
(175,300
)
Common stock
(300,000
)
(100,000
)
Retained earnings, 12/31/18
(859,092
)
(336,000
)
Total liabilities and equities
$
(1,626,804
)
$
(611,300
)
Show how McIlroy determined the $443,504 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinsons income.
Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2018.
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