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)
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)
Related questions
Plaza, Inc., acquires 80 percent of the outstanding common stock of Stanford Corporation on January 1, 2018, in exchange for $912,900 cash. At the acquisition date, Stanfordâs total fair value, including the noncontrolling interest, was assessed at $1,141,125. Also at the acquisition date, Stanford's book value was $524,500.
Several individual items on Stanfordâs financial records had fair values that differed from their book values as follows:
| Book Value | Fair Value | ||||||
| Tradenames (indefinite life) | $ | 286,700 | $ | 350,700 | |||
| Property and equipment (net, 8-year remaining life) | 231,200 | 248,800 | |||||
| Patent (14-year remaining life) | 113,300 | 146,900 | |||||
For internal reporting purposes, Plaza, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies.
| Plaza | Stanford | ||||||
| Revenues | $ | (755,900 | ) | $ | (746,500 | ) | |
| Cost of goods sold | 417,900 | 315,500 | |||||
| Depreciation expense | 177,100 | 28,900 | |||||
| Amortization expense | 22,500 | ||||||
| Equity in income of Stanford | (300,000 | ) | 0 | ||||
| Net income | $ | (460,900 | ) | $ | (379,600 | ) | |
| Retained earnings, 1/1/18 | $ | (1,016,600 | ) | $ | (422,000 | ) | |
| Net income | (460,900 | ) | (379,600 | ) | |||
| Dividends declared | 239,200 | 22,000 | |||||
| Retained earnings, 12/31/18 | $ | (1,238,300 | ) | $ | (779,600 | ) | |
| Current assets | $ | 685,600 | $ | 344,300 | |||
| Investment in Stanford | 1,195,300 | 0 | |||||
| Tradenames | 191,400 | 286,700 | |||||
| Property and equipment (net) | 821,500 | 202,300 | |||||
| Patents | 0 | 90,800 | |||||
| Total assets | $ | 2,893,800 | $ | 924,100 | |||
| Accounts payable | $ | (113,300 | ) | $ | (42,000 | ) | |
| Common stock | (239,200 | ) | (84,000 | ) | |||
| Additional paid-in capital | (1,303,000 | ) | (18,500 | ) | |||
| Retained earnings (above) | (1,238,300 | ) | (779,600 | ) | |||
| Total liabilities and equities | $ | (2,893,800 | ) | $ | (924,100 | ) | |
At year-end, there were no intra-entity receivables or payables.
Prepare a worksheet to consolidate the financial statements of Plaza, Inc. and its subsidiary Stanford.
