Question

On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing Inc., for a total of $980,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $700,000, retained earnings of $250,000, and a noncontrolling interest fair value of $245,000. Corvan 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:

2017: net income = $150,000, dividends declared = $35,000, inventory purchases from Corgan = $100,000

2018: net income = $130,000, dividends declared = $45,000, inventory purchases from Corgan = $120,000

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 40 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 Corvan and Smashing.

Answer 1

ANSWER

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Answer 2

A)

INVESTMENTS AS ON 1/1/17	$     980,000
ADD: NET INCOME OF 2017 (80% SHARE)	$     120,000
LESS: DIVIDEND FOR 2017 (80% SHARE)	$     (28,000)
LESS: SHARE OF PROFITS IN REMAINING 40% INVENTORY	$     (15,000)
INVESTMENTS AS ON 31/12/17	$ 1,057,000
ADD: NET INCOME OF 2018 (80% SHARE)	$     104,000
LESS: DIVIDEND FOR 2018 (80% SHARE)	$     (36,000)
LESS: SHARE OF PROFITS IN REMAINING 40% INVENTORY	$     (18,000)
INVESTMENTS AS ON 31/12/18	$ 1,107,000

B)

			ELIMINATIONS		CONSOLIDATIONS
	CORGON	SMASHING	DEBIT	CREDIT
INCOME STATEMENT
SALES	$                 -	$                   -	$   102,000		$           -
Cost of goods sold	$                 -	$                   -		$ 102,000	$           -
STATEMENT OF RE:
RETAINED EARNINGS		$       250,000	$   250,000		$           -
NET INCOME		$       130,000	$   130,000		$           -
DIVIDENDS		$       (45,000)	$   (45,000)		$           -
RETAINED EARNINGS 2/3		$       335,000	$   335,000		$           -
BALANCE SHEET
INVENTORIES				$ (18,000)	$ 18,000

Answer 3

I need you to explain to me how to figure out the amount of "S" & "A" entries.