Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,015,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $800,000, retained earnings of $350,000, and a noncontrolling interest fair value of $435,000. 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	$	250,000		$	45,000		$	200,000
2018		230,000			55,000			220,000

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.

A) Prepare Journal entries for G*, S, A, I, D, E, TI, G. with debit and credits to each account.

Answer 1

1. Calculation of excess of fair value

Acquired value	$1015000
Non controlling interest fair value	435000
Smashing acquisition date fair value	1450000
Book value of subsidiary (800000+350000)	(1150000)
Excess fair over book value	$300000

2. Amortization schedule

Excess assigned to covenants (a)	300000
Useful life in years (b)	20
Annual amortization (a/b)	$15000

3. Elimination of inventory mark up

Ending inventory downstream mark-up
2017
Sales to smashing	200000
Mark up	60% on cost
Actual cost (200000/1.60)	125000
Intercompany group profit	$75000
Closing inventory gross profit (75000*30%)	$22500
2018
Sale to smashing	220000
Mark up	60% on cost
Actual cost (220000/1.60)	137500
Intercompany gross profit	$82500
Closing inventory gross profit (82500*30%)	$24750

A) calculation of corgans investment in smashing inc. Account as of December 31,2018

Consideration paid		1015000
2017
Smashing net income (250000*70%)	175000
Covenant amortization (wn-2) (15000*70%)	(10500)
Elimination of intercompany gross profit (wn-3)	(22500)	142000
Equity as of December 31,2017		1157000
Less: dividend (45000*70%)		(31500)
Investment as of December 31,2017		1125500
2018
Smashing net income (230000*70%)	161000
Covenant amortization (wn-2) (15000*70%)	(10500)
Opening investment profit recognization	22500
Elimination of intercompany gross profit (wn-3)	(24750)	148250
Equity as of December 31,2018		1273750
Less: dividend ( 55000*70%)		(38500)
Investment as of December 31,2018		1235250

Journal entries:-

	Particular	Debit ($)	Credit ($)
G*	investment in smashing	22500
	To cost of goods sold		22500
S	common stock	800000
	Retained earnings (350000+250000-45000)	555000
	To investment in smashing (800000+555000)*70%		948500
	To non controlling interest		406500
A	covenant (300000-15000)	285000
	To investment in smashing		199500
	To non controlling interest		85500
I	equity in earning smash	137500
	To investment in smashing		137500
D	investment in smashing	38500
	To dividend payable		38500
E	Amortization expenses	15000
	To covenants		15000
TI	sales	220000
	To cost of goods sold		220000
G	cost of goods sold	24750
	To inventory		24750