On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting

Question

On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $880,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $730,000 retained earnings of $280,000, and a noncontrolling interest fair value of $220,000. 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 Declared from Corgan $38,000 Net Income 2017 $180,000 2018 160,000 $130,000 150,000 48,000 Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 50 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.

Explanation / Answer

Consideration transferred by Corgan 880000 Noncontrolling interest fair value 220000 smashing's acquisition-date fair value 1100000 book value of subsidiary 1010000 Excess fair value over book value 90000 Excess assigned to covenants 90000 useful life in years 20 Annual Amortization 4500 2017 Ending Inventory Profit Deferral Cost = $130000/1.6= $81,250 Infra-entity gross profit (130000-81250) 48750 Ending Inventory gross profit(48750 * 40%) 19500 2018 Ending Inventory Profit Deferral Cost = 160000/1.6 = 100000 Intra-Entity gross profit = 150000 - 100000 50000 Ending Inventory gross profit = 56250 * 40% 20000 a. Investment Account: Consideration Transferred, January 1, 2017 880000 Smashings 2017 income * 80% 144000 Covenants amortization ( * 80%) -3600 ending inventory profit deferral (100%) -19500 Equity in smashing's earnings 120900 2017 Dividend -30400 Investment Balance 12/31/2017 970500 Smashing's 2018 Income ( * 80%) 128000 Covenants amortization ( * 80%) -3600 Beginning Inventory Profit Recognition 19500 ending inventory profit deferral (100%) -20000 Equity in smashing's earnings 123900 2018 Dividend -38400 Investment Balance 12/31/2018 85500 b. 12/31/2018 Working Adjustments Investment in Smashing 19500       Cost of Goods sold 19500 Common Stock - Smashing 730000 Retained Earnings - Smashing (280000+180000-38000) 422000          Investment in Smashing 921600        Non-Controlling Interest 230400 Covenants 85500       Investments in Smashing 68400       Noncontrolling Interest 17100 Equity in Earnings of Smashing 123900         Investment in Smashing 123900 Investment in smashing 38400         Dividends Paid 38400 Amortization Expense 4500        Covenants 4500 Sales 150000       Cost of Goods sold 150000 (Inter-entity transaction eliminated from sales and cost of goods sold) Cost of Goods Sold 20000           Inventory 20000

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