On January 1, 2014, McIlroy, I
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On January 1, 2014, McIlroy, Inc., acquired a 60 percentinterest 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, theacquisition-date fair value of the 40 percent noncontrollinginterest was $248,000. The subsidiary held patents (with a 10-yearremaining life) that were undervalued within the company’saccounting records by $70,000 and an unrecorded customer list(15-year remaining life) assessed at a $45,000 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-entityinventory sales between the two companies have been made asfollows: |
| Year | Cost toMcIlroy | TransferPriceto Stinson | EndingBalance(at transfer price) |
| 2014 | 120,000 | 150,000 | 50,000 |
| 2015 | 112,000 | 160,000 | 40,000 |
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The individual financial statements for thesetwo companies as of December 31, 2015, and the year then endedfollow: |
| McIlroy, Inc. | Stinson, Inc. | |||
| Sales | $ | (700,000) | $ | (335,000) |
| Cost of goodssold | 460,000 | 205,000 | ||
| Operatingexpenses | 188,000 | 70,000 | ||
| Equity earnings inStinson | (28,000) | 0 | ||
| Net income | $ | (80,000) | $ | (60,000) |
| Retained earnings,1/1/15 | $ | (695,000) | $ | (280,000) |
| Net income(above) | (80,000) | (60,000) | ||
| Dividendsdeclared | 45,000 | 15,000 | ||
| Retained earnings,12/31/15 | $ | (730,000) | $ | (325,000) |
| Cash andreceivables | $ | 248,000 | $ | 148,000 |
| Inventory | 233,000 | 129,000 | ||
| Investment inStinson | 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 andequities | $ | (1,420,000) | $ | (585,000) |
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1. Show how the the followingconsolidated balances for 2015 are calculated: a)Consolidated cost of goods sold b)Consolidated inventory c)Consolidated patent 2. What is the consolidated balance for goodwill onJanuary 1,2014? |
Answer:
Acquisition-date fair value allocation and excessamortizations
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 Annual Excess
Excess fair value assignments……………. Life Amortizations
to patents………………………………………………. 70,000 10yrs. $7,000
to customer list …………………………………….. 45,000 15yrs. 3,000
to goodwill …………………………………………….$185,000 indefinite -0-
$10,000
Determination ofInvestment in Stinson account balance
Consideration transferred………………………………………………… $372,000
Increase in Stinson’s retained earnings 1/1/14 to1/1/15
[(280,000 – 220,000) ×60%]…………………………………………. $36,000
Excess fair value amortization ×60%………………………….. (6,000)
2014 endinginventory profit deferral (100%)………………. (10,000) 20,000
McIlroy’s equity earnings in Stinson for 2015*……………. 28,000
Stinson 2015 dividends paid to McIlroy………………………. (9,000)
Investment accountbalance 12/31/15………………………………. $411,000
*Stinson’s 2015income…………………………………………………. $60,000
Excess fair valueamortization…………………………………….. (10,000)
Adjusted netincome…………………………………………………….. $50,000
McIlroy’s percentageownership…………………………………. 60%
McIlroy’s share of Stinson’s adjusted netincome……… $30,000
2014 intra-entity inventory profit recognized………………. 10,000
2015 intra-entity inventory profit deferred…………………… (12,000)
McIlroy’ equity earnings inStinson……………………………… $28,000
Intra-entity profits(downstream) 2014 2015
Intra-entity transfers remaining ininventory 50,000 40,000
Gross profitrate** 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
Income of Stinson (28,000) (I) 28,000 -0-
Separate company income (80,000) (60,000)
Consolidated net income (100,000)
to noncontrollinginterest (20,000) 20,000
toparent (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 paid 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
Customerlist (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)
Note: consolidated balnaces are in workshhet final balances, 2014goodwill is calculated in 1st part.
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