In: Accounting
On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,120,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $830,000, retained earnings of $380,000, and a noncontrolling interest fair value of $480,000. 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 | $ | 280,000 | $ | 48,000 | $ | 230,000 | |||
2018 | 260,000 | 58,000 | 250,000 | ||||||
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 30 percent of the current year purchases remain in Smashing's inventory.
The consolidated worksheet entries are prepared as below: | ||||
Transaction | Consolidating Entries | Debit | Credit | |
1) Prepare Entry *G | ||||
1 | Investment in Smashing | $25,875 | ||
Cost of Goods Sold | $25,875 | |||
2) Prepare Entry S | ||||
2 | Common Stock-Smashing | $830,000 | ||
Retained Earnings-Smashing | $380,000 | |||
Investment in Smashing -bal fig | $847,000 | |||
Non controlling Interest-30%(830000+380000) | $363,000 | |||
2) Prepare Entry A | ||||
3 | Covenants(390000-19500) | $370,500 | ||
Investment in Smashing | $259,350 | |||
Non controlling Interest | $111,150 | |||
4) Prepare Entry I | ||||
4 | Equity in Earnings of Smashing | $166,100 | ||
Investment in Smashing | $166,100 | |||
5) Prepare Entry D | ||||
5 | Investment in Smashing | $40,600 | ||
Dividends Declared | $40,600 | |||
6) Prepare Entry E | ||||
6 | Amortization Expense | $19,500 | ||
Covenants | $19,500 | |||
7) Prepare Entry TI | ||||
7 | Sales | $250,000 | ||
Cost of Goods Sold | $250,000 | |||
8) Prepare Entry G | ||||
8 | Cost of Goods Sold | $28,125 | ||
Inventory | $28,125 | |||
Notes: | ||||
The computation of various items is shown as below: | ||||
1) | ||||
Annual Amortization Expense: | ||||
Consideration Transferred by Corgan | 1,120,000 | |||
Add Non Controlling Interest- Fair Value | 480,000 | |||
Smashing's Acquisition-Date Fair Value | 1,600,000 | |||
Book Value of Subsidiary | 1,210,000 | |||
Excess of Fair Value Over Book Value Assigned to Covenants | 390,000 | |||
Annual Amortization (390,000/20) | $19,500 | |||
2) | ||||
Ending Year Profit Deferral (2017): | ||||
Cost = 230,000/1.6 = $143750 | ||||
Intra- Entity Gross Profit = 230,000 - 143750 = $86250 | ||||
Ending Inventory Gross Profit = 86250*30% = $25875 | ||||
Ending Year Profit Deferral (2018): | ||||
Cost = 250,000/1.6 = $156250 | ||||
Intra-Entity Gross Profit = 250,000 - 156250 = $93750 | ||||
Ending Inventory Gross Profit = 93750*30% = $28125 | ||||
3) | ||||
Equity in Smashing's Earnings: | ||||
Smashing's 2018 Net Income (260,000*70%) | 182,000 | |||
Less Covenant Amortization (19,500*70%) | 13,650 | |||
Add Beginning Inventory Profit Recognition | 25,875 | |||
Less Ending Inventory Profit Deferral | 28,125 | |||
Equity in Smashing's Earnings | $166,100 |