Question

Check my work On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $840,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $720,000, retained earnings of $270,000, and a noncontrolling interest fair value of $210,000. 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: Inventory Purchases Dividends Net Income Declared fron Corgan $37,000 47,000 2017 $170,000 2018 150,000 $120,000 140,000 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 Corgan and Smashing Complete this question by entering your answers in the tabs below. Required A Required B Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018 balance 12/31/18

Answer 1

Consideration transferred by Corgan	840000
Noncontrolling interest fair value	210000
Smashing’s acquisition-date fair value	1050000
Book value of subsidiary	990000
Excess fair over book value	60000
Excess assigned to covenants	60000
Useful life in years	÷ 20
Annual amortization	3000

2017 Ending Inventory Profit Deferral

Cost	120000/1.6	75000
Intercompany Gross profit	120000-75000	45000
Ending inventory gross profit	45000*40%	18000

2018 Ending Inventory Profit Deferral

Cost	140000/1.6	87500
Intercompany Gross profit	(140000-87500)	52500
Ending inventory gross profit	52500*40%	21000

Part A Investment account:

Consideration transferred, January 1, 2017		840000
Smashing’s 2017 income × 80%	136000
Covenant amortization (3000 × 80%)	(2400)
Ending inventory profit deferral (100%)	(18000)
Equity in Smashing’s earnings		115600
2017 dividends (37000*80%)		(29600)
Investment balance 12/31/17		926000
Smashing’s 2018 income × 80%	120000
Covenants amortization (3000 × 80%)	(2400)
Beginning inventory profit recognition	18000
Ending inventory profit deferral (100%)	(21000)
Equity in Smashing’s earnings		114600
2018 dividends (47000*80%)		(37600)
Investment balance 12/31/10		1003000

Part B

No.	Account titles and explanation	Debit	Credit
*G	Equity in earnings of Smashing	18000
	COGS		18000
S	Common stock—Smashing	720000
	Retained earnings—Smashing (270000-170000-37000)	63000
	Investment in Smashing (720000+63000)*80%		626400
	Noncontrolling interest (720000+63000)*20%		156600
A	Covenants (60000-3000)	57000
	Investment in Smashing (57000*80%)		45600
	Noncontrolling interest (57000*20%)		11400
I	Equity in earnings of Smashing	87500
	Investment in Smashing		87500
D	Investment in Smashing (47000*80%)	37600
	Dividends paid		37600
E	Amortization expense	3000
	Covenants		3000
TI	Sales	140000
	COGS		140000
G	COGS	21000
	Inventory		21000