On January 1, 2017, McIlroy, Inc., acquired a 60 percentinterest in the common stock of Stinson, Inc., for $378,000.Stinson's book value on that date consisted of common stock of$100,000 and retained earnings of $223,400. Also, theacquisition-date fair value of the 40 percent noncontrollinginterest was $252,000. The subsidiary held patents (with a 10-yearremaining life) that were undervalued within the company'saccounting records by $80,800 and an unrecorded customer list(15-year remaining life) assessed at a $56,400 fair value. Anyremaining excess acquisition-date fair value was assigned togoodwill. Since acquisition, McIlroy has applied the equity methodto its Investment in Stinson account and no goodwill impairment hasoccurred. At year end, there are no intra-entity payables orreceivables.
Intra-entity inventory sales between the two companies have beenmade as follows:
| Year | Cost to McIlroy | Transfer Price
to Stinson | Ending Balance
(at transfer price) |
| 2017 | $130,200 | $162,750 | $54,250 |
| 2018 | 112,500 | 150,000 | 37,500 |
|
The individual financial statements for these two companies asof December 31, 2018, and the year then ended follow:
| McIlroy, Inc. | | Stinson, Inc. |
| Sales | $ | (740,000 | ) | | $ | (374,000 | ) |
| Cost of goods sold | | 486,300 | | | | 228,400 | |
| Operating expenses | | 199,215 | | | | 77,800 | |
| Equity in earnings in Stinson | | (35,051 | ) | | | 0 | |
| Net income | $ | (89,536 | ) | | $ | (67,800 | ) |
| Retained earnings, 1/1/18 | $ | (791,100 | ) | | $ | (283,700 | ) |
| Net income | | (89,536 | ) | | | (67,800 | ) |
| Dividends declared | | 48,800 | | | | 19,400 | |
| Retained earnings, 12/31/18 | $ | (831,836 | ) | | $ | (332,100 | ) |
| Cash and receivables | $ | 283,400 | | | $ | 151,200 | |
| Inventory | | 266,200 | | | | 131,800 | |
| Investment in Stinson | | 419,637 | | | | 0 | |
| Buildings (net) | | 346,000 | | | | 206,100 | |
| Equipment (net) | | 247,000 | | | | 89,900 | |
| Patents (net) | | 0 | | | | 24,500 | |
| Total assets | $ | 1,562,237 | | | $ | 603,500 | |
| Liabilities | $ | (430,401 | ) | | $ | (171,400 | ) |
| Common stock | | (300,000 | ) | | | (100,000 | ) |
| Retained earnings, 12/31/18 | | (831,836 | ) | | | (332,100 | ) |
| Total liabilities and equities | $ | (1,562,237 | ) | | $ | (603,500 | ) |
|
Show how McIlroy determined the $419,637 Investment in Stinsonaccount balance. Assume that McIlroy defers 100 percent ofdownstream intra-entity profits against its share of Stinson’sincome.
Prepare a consolidated worksheet to determine appropriatebalances for external financial reporting as of December 31,2018.
