Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,190,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $850,000, retained earnings of $400,000, and a noncontrolling interest fair value of $510,000. 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:

Question 1: On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,190,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $850,000, retained earnings of $400,000, and a noncontrolling interest fair value of $510,000. 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 $ 300,000 $ 50,000 $ 250,000 2018 280,000 60,000 270,000 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. Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018. Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing. Required A: Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as of December 31,2018. Investment balance 12/31/18 $______________ Required B: Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing. (If no entry required for a transaction/event, select “No journal entry required” in the firs account field. 1 1 Investment in Smashing Cost of goods sold 2 2 Common stock – Smashing Retained earnings - Smashing Investment in Smashing Noncontrolling interest 3 3 Covenants Investment in Smashing Noncontrolling interest 4 4 Equity in earnings of Smashing Investment in Smashing 5 5 Investment in Smashing Dividends declared 6 6 Amortization expense Covenants 7 7 Sales Cost of goods sold 8 8 Cost of goods sold Inventory

Answer 1

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Consideration transferred by Corgan		$                                                                              1,190,000
Non-controlling interest fair value		$                                                                                  510,000
Smashing’s acquisition-date fair value		$                                                                              1,700,000
Book value of subsidiary		$                                                                            (1,250,000)
Excess fair over book value		$                                                                                  450,000
Excess assigned to covenants		$                                                                                  450,000
Remaining useful life in years		÷20
Annual amortization		$                                                                                    22,500
2017 Ending Inventory Profit Deferral
Cost	$250,000/1.60	$                                                                                  156,250
Intra Entity Gross Profit	$250,000-$156,250	$                                                                                    93,750
Ending Inventory Gross Profit	$93,750*40%	$                                                                                    37,500
2018 Ending Inventory Profit Deferral
Cost	$270,000/1.60	$                                                                                  168,750
Intra Entity Gross Profit	$270,000-$168,750	$                                                                                  101,250
Ending Inventory Gross Profit	$101,250*40%	$                                                                                    40,500
Part a
Consideration transferred, January 1, 2017		$                                                                              1,190,000
Smashing’s 2017 Net income× 80%	$                         240,000
Covenant amortization (22,500 × 80%)	$                         (18,000)
Ending inventory profit deferral (100%)	$                         (37,500)
Equity in Smashing’s earnings		$                                                                                  184,500
2017 dividends ($50,000*80%)		$                                                                                  (40,000)
Investment balance 12/31/17		$                                                                              1,334,500
Smashing’s 2018 Net income× 80%	$                         224,000
Covenant amortization (22,500 × 80%)	$                         (18,000)
Beginning inventory profit recognition	$                           37,500
Ending inventory profit deferral (100%)	$                         (40,500)
Equity in Smashing’s earnings		$                                                                                  203,000
2018 dividends		$                                                                                  (48,000)
Investment balance 12/31/18		$                                                                              1,489,500
Part b
Investment in Smashing	$                           37,500
Cost of goods sold		$                                                                                    37,500
Common stock—Smashing	$                         850,000
Retained earnings—Smashing	$                         437,500
Investment in Smashing		$                                                                              1,030,000
Non-controlling interest		$                                                                                  257,500
Covenants	$                         427,500
Investment in Smashing		$                                                                                  342,000
Non-controlling interest		$                                                                                    85,500
Equity in earnings of Smashing	$                         203,000
Investment in Smashing		$                                                                                  203,000
Investment in Smashing	$                           48,000
Dividends declared ($60,000*80%)		$                                                                                    48,000
Amortization expense	$                           22,500
Covenants		$                                                                                    22,500
Sales	$                         270,000
Cost of Goods Sold		$                                                                                  270,000
Cost of goods sold	$                           40,500
Inventory		$                                                                                    40,500