Question

On January 1, 2020, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,050,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $810,000, retained earnings of $360,000, and a noncontrolling interest fair value of $450,000. 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: Dividends Declared $ 46,000 56,000 Net Income $ 260,000 240,000 Inventory Purchases from Corgan $210,000 230,000 2020 2021 Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 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, 2021. b. Prepare the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing.

Answer 1

$ 1,050,000 450,000 1,500,000 Acquisition Analysis Consideration transferred by Corgan Fair value of Non controlling interest Fair value of Smashing company Less: Book value of Smashing Company Common stock Retained earnings Excess of Fair value over book value $ 810,000 360,000 $ (1,170,000) 330,000 Amortization per year [A/B] 20 $ 16,500 Allocation of Excess value to specified assets Initial Value [A] $ 330,000 Life [B] Covenants Calculation of Deferred profit on intra company inventory transfer downstream: Year 2020 Inventory purchase from Corgan $ 210,000 Profit % on cost 60% Cost price (210,000 / 160%) $ 131,250 Gross profit on transfer (210,000 - 78,750) $ 78,750 Unsold Inventory percentage 40% Deferred profit (78,750 x 40%) $ 31,500 $ Year 2021 Inventory purchase from Corgan Profit on cost Cost price (230,000 / 160%) Gross profit on transfer (230,000 - 143,750) Unsold Inventory percentage Deferred profit (86,250 x 40%) $ $ 230,000 60% 143,750 86,250 40% 34,500 $

a. Compute the Equity method balance 1,050,000 182,000 (11,550) (31,500) 138,950 (32,200) 1,156,750 Consideration transferred Add: Equity in Smashing's earnings 2020 Net income of Smashing (260,000 70%) Covenant Amortization (16,500 x 70%) Deferred profit in intra company transfer Less: 2020 Dividends (46,000 ~ 70%) Equity Investment in 01/01/2021 Add: Equity in Smashing's earnings 2021 Net income of Smashing (240,000 x 70%) Covenant Amortization (16,500 x 70%) Previous year deferred profit realized during the year Deferred profit in intra company transfer in 2021 Less: 2021 Dividends (56,000 ~ 70%) Investment Balance in 12/31/2021 168,000 (11,550) 31,500 (34,500) 153,450 (39,200) 1,271,000 $ Investment Balance 12/31/21 $ 1,271,000

Debit Credit $ 31,500 Journal Entry Transaction General Journal *G Investment in Smashing Cost of goods sold (to eliminate the beginning deferred profit on intra company inventory transfer) $ 31,500 S $ $ 810,000 574,000 Common Stock - Smashing Retained Earnings - Smashing Investment in Smashing (810,000 + 574,000) * 70% Non controlling interest (810,000 + 574,000) * 30% (to eliminate the subsidiary stockholders' equity) $ $ 968,800 415,200 A $ 313,500 Covenants Investment in Smashing (313,500 x 70%) Non controlling interest (313,500 30%) (to record unamortized value of covenants as on 01/01/21) $ $ 219,450 94,050 I $ 153,450 Equity in earnings of Smashing Investment in Smashing (to eliminate equity earnings) $ 153,450 D $ 39,200 Investment in Smashing Dividends declared (to eliminate the dividend declared by smashing) $ 39,200 E $ 16,500 Amortization expense Covenants (To record amortization expense) $ 16,500

TI $ 230,000 Sales Cost of goods sold (to eliminate intra company inventory transfer 2021) $ 230,000 G $ 34,500 Cost of goods sold Inventory (to eliminate the deferred profit 2021) $ 34,500 $ Working Notes: 1) Calculation of retained earnings 01/01/21 Retained Earning of Smashing as on 01/01/20 Add: Net income Less: Dividends Retained Earning of Smashing as on 01/01/21 360,000 260,000 (46,000) 574,000 $ $ 2) Unamortized Covenants 01/01/21 Initial Value as on 01/01/20 Less: Amortization 2020 Carrying value as on 01/01/21 330,000 (16,500) 313,500 $

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