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On January 1, 2014, McIIroy, 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 $220,000. 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 $70,000, and an unrecorded customer list (15 year remaining life) assessed at a $45,000 fair value. Any remaining excess acquistion date fair value was assigned to goodwill. Since acquistion, McIIroy 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 McIIroy Transfer price to Stinson Ending Balance (at transfer price)
2014 $120,000 $150,000 $50,000
2015 $112,000 $160,000 $40,000
The individual financial statements for these two companies as of December 31, 2015 and the year then ended follow:
McIIroy, Inc. Stinson, Inc.
Sales $(700,000) $(335,000)
COGs 460,000 205,000
Operating expenses 188,000 70,000
Equity earnings in Stinson (28000) 0
Net income $(80,000) $(60,000)
Retained earnings 1/1/15 $(695,000) $(280,000)
Net income(above) (80,000) (60,000)
Dividends declared 45,000 15,000
Retained earnings 12-31-15 $(730,000) $(325,000)
Cash & receivables $248,000 $148,000
Inventory 233,000 129,000
Investment in Stinson 411,000 0
Buildings (net) 308,000 202,000
Equipment (net) 220,000 86,000
Patents (net) 0 20,000
Total assets $1,420,000 $585,000
Liabilities $(390,000) $(160,000)
Common Stock (300,000) (100,000)
Retained earnings 12-31-15 (730,000) (325,000)
Total liabilities & equities $(1,420,000) $(585,000)
a. Show how McIIroy determined the $411,000 investment in Stinson account balance. Assume that McIIroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income (amounts to be deducted should be indicated with a minus sign.)
Consideration transferred _______________________________
Increase in Stinson’s retained earnings 1/1/14 to 1/1/15______________________________
Excess fair value amortization _________________________________
2014 ending inventory profit deferral_____________________________
McIIroy’s equity in earnings of Stinson for 2015_____________________
Stinson 2015 dividends declared to McIIroy________________________
Investment account balance 12/31/15_____________________________
b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of Dec. 31, 2015.
Accounts McIIroy Stinson Debit Credit Non Controlling Interest Consolidation total
Sales $(700,000) $(335,000)
COGs 460,000 205,000
Operating exps 188,000 70,000
Equity in earnings of Stinson (28,000) 0
Seperate co. net income (80,000) (60,000)
Cons. net income
To NCI
To parent
Retained earnings 1/1 $(695,000) $(280,000)
Net income (80,000) (60,000)
Dividends declared 45,000 15,000
Retained earnings 12/31 (730,000) (325,000)
Cash & Rec’s $248,000 $148,000
Inventory 233,000 129,000
Investment in Stinson 411,000 0
Bldgs (net) 308,000 202,000
Equip(net) 220,000 86,000
Patents(net) 0 20,000
Customer list
Goodwill
Total Assets $1,420,000 $585,000
Liabilities (390,000) (160,000)
Common Stock 300,000 100,000
NCI 1/1
NCI 12/31
Retained earnings 12/31 (730,000) (325,000)
Total Liabilities & equity $(1,420,000) $(585,000)
Expert Answer
Solution:
a. Consideration transferred …………………………….. $372,000
Noncontrolling interest fair value……………… 248,000
Subsidiary fair value at acquisition-date …. $620,000
Acquisition-date book value……………………… (320,000)
Fair value in excess of book value …………… $300,000 Remaining Annual Excess
Excess fair value assignments……………. Life Amortizations
to patents………………………………………………. 70,000 10 yrs. $7,000
to customer list …………………………………….. 45,000 15 yrs. 3,000
to goodwill ……………………………………………. $185,000 indefinite -0-
$10,000
Determination of Investment in Stinson account balance
Consideration transferred ………………………………………………… $372,000
Increase in Stinson’s retained earnings 1/1/14 to 1/1/15
[(280,000 – 220,000) × 60%]…………………………………………. $36,000
Excess fair value amortization × 60%………………………….. (6,000)
2014 ending inventory profit deferral (100%)………………. (10,000) 20,000
McIlroy’s equity in earnings of Stinson for 2015*……….. 28,000
Stinson 2015 dividends declared to McIlroy……………….. (9,000)
Investment account balance 12/31/15………………………………. $411,000
* Stinson’s 2015 net income…………………………………………… $60,000
Excess fair value amortization…………………………………….. (10,000)
Adjusted net income…………………………………………………….. $50,000
McIlroy’s percentage ownership…………………………………. 60%
McIlroy’s share of Stinson’s adjusted net income……… $30,000
2014 intra-entity inventory profit recognized………………. 10,000
2015 intra-entity inventory profit deferred…………………… (12,000)
McIlroy’s equity in earnings of Stinson……………………….. $28,000
Intra-entity profits (downstream) 2014 2015
Intra-entity transfers remaining in inventory $50,000 $40,000
Gross profit rate** 20% 30%
$10,000 $12,000
**(150,000 – 120,000) ÷ 150,000 = 20%
(160,000 – 112,000) ÷ 160,000 = 30%
b. McIlroy Stinson Adj. & Elim. NCI Consolidated
Sales (700,000) (335,000) (TI)160,000 (875,000)
Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 507,000
(TI) 160,000
Operating expenses 188,000 70,000 (E) 10,000 268,000
Equity in earnings of Stinson (28,000) (I) 28,000 -0-
Separate company net income (80,000) (60,000)
Consolidated net income (100,000)
to noncontrolling interest (20,000) 20,000
to McIlroy, Inc. (80,000)
Retained earnings, 1/1 (695,000) (280,000) (S) 280,000 (695,000)
Net income (above) (80,000) (60,000) (80,000)
Dividends declared 45,000 15,000 (D) 9,000 6,000 45,000
Retained earnings, 12/31 (730,000) (325,000) (730,000)
Cash and receivables 248,000 148,000 396,000
Inventory 233,000 129,000 (G) 12,000 350,000
Investment in Stinson 411,000 -0- (D) 9,000 (S) 228,000 -0-
(*G) 10,000 (A)174,000
(I) 28,000
Buildings (net) 308,000 202,000 510,000
Equipment (net) 220,000 86,000 306,000
Patents (net) -0- 20,000 (A) 63,000 (E) 7,000 76,000
Customer list (A) 42,000 (E) 3,000 39,000
Goodwill (A)185,000 185,000
Total assets 1,420,000 585,000 1,862,000
Liabilities (390,000) (160,000) (550,000)
Common stock (300,000) (100,000) (S) 100,000 (300,000)
Noncontrolling interest 1/1 (S) 152,000
(A)116,000 (268,000)
Noncontrolling interest 12/31 (282,000) (282,000)
Retained earnings, 12/31 (730,000) (325,000) (730,000)
Total liabilities and equities (1,420,000) (585,000) 899,000 899,000 (1,862,000)
