On January 1, 2012, Corgan Company acquired 70 percent of the outstanding voting
ID: 2475946 • Letter: O
Question
On January 1, 2012, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,435,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $920,000, retained earnings of $470,000, and a noncontrolling interest fair value of $615,000. Corgan attributed the excess of fair value over Smashing’s book value to various covenants with a 20-year life. Corgan uses the equity method to account for its investment in Smashing.
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2012 and 2013, 30 percent of the current year purchases remain in Smashing’s inventory.
Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as of December 31, 2013.
Prepare the worksheet adjustments for the December 31, 2013, consolidation of Corgan and Smashing.
On January 1, 2012, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,435,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $920,000, retained earnings of $470,000, and a noncontrolling interest fair value of $615,000. Corgan attributed the excess of fair value over Smashing’s book value to various covenants with a 20-year life. Corgan uses the equity method to account for its investment in Smashing.
During the next two years, Smashing reported the following:Explanation / Answer
Solution:
Consideration transferred by Corgan $1,435,000
Noncontrolling interest fair value 615,000
Smashing’s acquisition-date fair value 2,050,000
Book value of subsidiary 1,390,000
Excess fair over book value 660,000
Excess assigned to covenants 660,000
Useful life in years ÷ 20
Annual amortization $33,000
2012 Ending Inventory Profit Deferral
2013 Ending Inventory Profit Deferral
a. Investment account:
Consideration transferred, January 1, 2012 $1,435,000
Smashing’s 2012 income × 70% $259,000
Covenant amortization (33,000 × 70%) (23,100)
Ending inventory profit deferral (100%) (48,000)
Equity in Smashing’s earnings 187,900
2012 dividends (28,000)
Investment balance 12/31/12 $1,247,100
Smashing’s 2010 income × 70% $245,000
Covenants amortization (33,000 × 70%) (23,100)
Beginning inventory profit recognition 48,000
Ending inventory profit deferral (100%) (51,000)
Equity in Smashing’s earnings 218,900
2013 dividends (46,900)
Investment balance 12/31/13 $172,000
b. 12/31/10 Worksheet Adjustments
*G Equity in earnings of Smashing 48,000
COGS 48,000
S Common stock—Smashing 920,000
Retained earnings—Smashing 695,000
Investment in Smashing 1,130,500
Noncontrolling interest 484,500
A Covenants 627,000
Investment in Smashing 438,900
Noncontrolling interest 188,100
I Equity in earnings of Smashing 212,500
Investment in Smashing 212,500
D Investment in Smashing 46,900
Dividends paid 46,900
E Amortization expense 33,000
Covenants 33,000
TI Sales 259,000
COGS 259,000
G COGS 51,000
Inventory 51,000
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