### Financial Accounting Exercise: Investment Account Balance#### Exercise Instructionsa. Show how McIlroy determined the $422,239 Investment in Stinson account balance. Assume that McIlroy defers 100 percent of downstream intra-entity profits against its share of Stinson’s income.b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31, 2021.---#### Task InstructionsComplete this question by entering your answers in the tabs below.##### Required A (Tab):**Description:**Show how McIlroy determined the $422,239 Investment in Stinson account balance. Assume that McIlroy 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.)***Table Layout:**| **Description** | **Amount** ||------------------------------------------|-------------|| | || | || | || | || | || | || | |##### Required B (Tab):Click on "Required B" to switch to the second part of the exercise for further instructions on the worksheet preparation.---**Note for Users:**- Ensure to use appropriate accounting principles and methods to determine the investment balance.- Pay attention to details when preparing the consolidated worksheet for accurate financial reporting.- Amounts to be deducted should be indicated with a minus sign. ### Acquisition and Financial Reporting Case Study: McIlroy, Inc. and Stinson, Inc.**Acquisition Overview:**On January 1, 2020, McIlroy, Inc. acquired a 60 percent interest in the common stock of Stinson, Inc. for $384,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $227,100. The fair value of the 40 percent noncontrolling interest was $256,000. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $73,300 and an unrecorded customer list (15-year remaining life) assessed at a $49,500 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. McIlroy has applied the equity method to its investment in Stinson account with no goodwill impairment occurring. At year-end, there are no intra-entity payables or receivables.**Intra-entity Inventory Sales:**The table below outlines intra-entity inventory sales between McIlroy and Stinson:| Year | Cost to McIlroy | Transfer Price to Stinson | Ending Balance (at transfer price) ||------|------------------|---------------------------|-----------------------------------|| 2020 | $123,600 | $154,500 | $51,500 || 2021 | $113,100 | $150,800 | $37,700 |**Individual Financial Statements:**The following table provides the individual financial statements for McIlroy, Inc. and Stinson, Inc. for the year ended December 31, 2021:#### Financial Performance| Item | McIlroy, Inc. | Stinson, Inc. ||-------------------------------|-----------------|----------------|| Sales | $(711,000) | $(349,000) || Cost of goods sold | 467,300 | 213,400 || Operating expenses | 192,405 | 72,800 || Equity in earnings in Stinson | 32,177 | 0 || **Net income** | $(83,472) | $(62,800) |#### Retained Earnings| Item | McIlroy, Inc.

Answered: Image /qna-images/answer/85d057ec-6e3a-41b8-a98b-e12be8c5d81a.jpg

On January 1, 2020, Mcllroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $384,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $227,100. Also, the acquisition-date fair value of the 40 percent noncontrolling interest was $256,000. The subsidiary held patents (with a 10-year remaining life) that were undervalued within the company's accounting records by $73,300 and an unrecorded customer list (15-year remaining life) assessed at a $49,500 fair value. Any remaining excess acquisition-date fair value was assigned to goodwill. Since acquisition, Mcllroy 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: Transfer Price to Stinson Ending Balance (at transfer price) $154,500 150, 800 Year Cost to McIlroy 2020 2021 $123,600 113, 100 The individual financial statements for these two companies as of December 31, 2021, and the year then ended follow: McIlroy, Inc. Stinson, Inc. $ (711,000) $ (349,000) 213,400 467,300 192,405 (32,177) 72,800 0 (83,472) (739,000) (83,472) 46,200 Sales Cost of goods sold Operating expenses Equity in earnings in Stinson Net income Retained earnings, 1/1/21 Net income Dividends declared Retained earnings, 12/31/21 Cash and receivables Inventory Investment in Stinson Buildings (net) Equipment (net) Patents (net) Total assets Liabilities Common stock Retained earnings, 12/31/21 Total liabilities and equities (Note: Parentheses indicate a credit balance.) $ $ $51,500 37,700 $ $ (776,272) 264,400 248,400 422,239 322,000 230,000 0 $ 1,487,039 $ (410,767) (300,000) (776,272) $(1,487,039) $ (62,800) $ (281,100) (62,800) 16,100 $ (327,800) $ 149, 300 130, 100 0 203,300 86,900 21,400 $ 591,000 $ (163,200) (100,000) (327,800) $ (591,000)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets And Merger And Acquisition Activity

Section: Chapter Questions

Problem 37RQSC