Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $805,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $740,000, retained earnings of $290,000, and a noncontrolling interest fair value of $345,000. Corgan attributed the excess of fair value over Smashing's book value to various covenants with a 20-year remaining life. Corgan uses the equity method to account for its investment in Smashing.

During the next two years, Smashing reported the following:

	Net Income			Dividends Declared			Inventory Purchases from Corgan
2017	$	190,000		$	39,000		$	140,000
2018		170,000			49,000			160,000

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 30 percent of the current year purchases remain in Smashing's inventory.

a.Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.

b.Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing. $8HVVvRUjlKfpQAAAAASUVORK5CYII=$

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Answer 1

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Consideration transferred by Corgan		$                                                                                  805,000
Non-controlling interest fair value		$                                                                                  345,000
Smashing’s acquisition-date fair value		$                                                                              1,150,000
Book value of subsidiary		$                                                                            (1,030,000)
Excess fair over book value		$                                                                                  120,000
Excess assigned to covenants		$                                                                                  120,000
Remaining useful life in years		÷20
Annual amortization		$                                                                                       6,000
2017 Ending Inventory Profit Deferral
Cost	$140,000/1.60	$                                                                                    87,500
Intra Entity Gross Profit	$140,000-$87,500	$                                                                                    52,500
Ending Inventory Gross Profit	$52,500*40%	$                                                                                    21,000
2018 Ending Inventory Profit Deferral
Cost	$160,000/1.60	$                                                                                  100,000
Intra Entity Gross Profit	$160,000-$100,000	$                                                                                    60,000
Ending Inventory Gross Profit	$60,000*40%	$                                                                                    24,000
Part a
Consideration transferred, January 1, 2017		$                                                                                  805,000
Smashing’s 2017 Net income× 70%	$                         133,000
Covenant amortization (6,000 × 70%)	$                           (4,200)
Ending inventory profit deferral (100%)	$                         (21,000)
Equity in Smashing’s earnings		$                                                                                  107,800
2017 dividends ($39,000*70%)		$                                                                                  (27,300)
Investment balance 12/31/17		$                                                                                  885,500
Smashing’s 2018 Net income× 70%	$                         119,000
Covenant amortization (6,000 × 70%)	$                           (4,200)
Beginning inventory profit recognition	$                           21,000
Ending inventory profit deferral (100%)	$                         (24,000)
Equity in Smashing’s earnings		$                                                                                  111,800
2018 dividends		$                                                                                  (34,300)
Investment balance 12/31/18		$                                                                                  963,000
Part b
Investment in Smashing	$                           21,000
Cost of goods sold		$                                                                                    21,000
Common stock—Smashing	$                         740,000
Retained earnings—Smashing	$                         441,000
Investment in Smashing		$                                                                                  826,700
Non-controlling interest		$                                                                                  354,300
Covenants	$                         114,000
Investment in Smashing		$                                                                                    79,800
Non-controlling interest		$                                                                                    34,200
Equity in earnings of Smashing	$                         111,800
Investment in Smashing		$                                                                                  111,800
Investment in Smashing	$                           34,300
Dividends declared ($49,000*70%)		$                                                                                    34,300
Amortization expense	$                             6,000
Covenants		$                                                                                       6,000
Sales	$                         160,000
Cost of Goods Sold		$                                                                                  160,000
Cost of goods sold	$                           24,000
Inventory		$                                                                                    24,000