Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,295,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $880,000, retained earnings of $430,000, and a noncontrolling interest fair value of $555,000. 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:

	Net Income			Dividends Declared			Inventory Purchases from Corgan
2017	$	330,000		$	53,000		$	280,000
2018		310,000			63,000			300,000

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.

1. Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.
2. Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

Answer 1

Consideration transferred by Corgan	1,295,000
Non controlling interest fair value	555,000
Smashing Acquisition date fair value	1,850,000
Book value of Smashing	1,310,000
Excess fair over book value	540,000
Excess assigned to covenants	540,000
Remaining use full life in year	20
Annual amortisation	27,000
Covenants	513,000
2017 Ending Inventory profit deferral
Cost : $280000 / 1.6	175,000
Intra - entity gross profit : $280000-$175000	105,000
Ending Inventory gross profit : $105000*50%	52,500
2018 Ending Inventory profit deferral
Cost : $ 300000/1.6	187,500
Intra - entity gross profit : $300000-187500	112,500
Ending Inventory gross profit: $ 112500*50%	56,250
Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018
Considering transfer 1 Jan,2017	1,295,000
Smashing 2017 net Income x 70%	231,000
Covenant Amortisation (27000*70%)	(18,900)
Ending inventory profit deferral (100%)	(52,500)
Equity in Smashing earning	159,600
2017 Dividend Income	(37,100)
Investment Balance on 31 Dec 2017	1,417,500
Smashing 2018 net Income x 70%	217,000
Covenant Amortisation (27000*70%)	(18,900)
Beginning profit recognition	52,500
Ending inventory profit deferral (100%)	(56,250)
Equity in Smashing earning	194,350
2018 Dividend Income	(44,100)
Investment Balance on 31 Dec 2018	1,567,750

Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing

Transaction	Account	Debit	Credit
1	Investment in Smashing	52,500
	Cost of Good Sold		52,500
2	Common stock smashing	880,000
	Retained earning- Smashing	707,000
	Investment in Smashing		1,110,900
	Noncontrolling interest		476,100
3	Covenants	513,000
	Investment in Smashing		359,100
	Noncontrolling Interest		153,900
4	Equity in earning of Smashing	194,350
	Investment in Smashing		194,350
5	Investment in Smashing	44,100
	Dividend declared		44,100
6	Amortisation expenses	27,000
	Covenants		27,000
7	Sales	300,000
	Cost of goods sold		300,000
8	Cost of goods sold	56,250
	Inventory		56,250