On January 1, 2010, Woods, Inc., acquired a 60 percent interest in the common stock of Scott, Inc., for $672,000. Scott’s book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Also, the January 1, 2010, fair value on 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 acquisition-date fair value was assigned to goodwill. Since acquisition, Woods has applied the equity method to its Investment in Scott account and no goodwill impairment has occurred.

Intra-entity inventory sales between the two companies have been made as follows:

The individual financial statements for these two companies as of December 31, 2011, and the year then ended follow:

a. Show how Woods determined the $411,000 Investment in Scott account balance. Assume that Woods defers 100 percent of downstream intra-entity profits against its share of Scott’s income.
b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of December 31,2011.

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Year 2010 2011 Cost to Woods 120,000 112,000 Transfer Price to Scott 150,000 160,000 Ending Balance (at transfer price) 50,000 40,000 Woods, Inc. Scott, Inc. Cost of goods sold Operating expenses Equity earnings in Scott Retained earnings, 1/1/11 Net income (above) Retained earnings, 12/31/11 Cash and receivables Equipment (net) Retained earnings, 12/31/11 Total liabilities and equities 1.420,000) S585,000)