Question

On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,080,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $780,000, retained earnings of $330,000, and a noncontrolling interest fair value of $270,000. 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	$	230,000		$	43,000		$	180,000
2018		210,000			53,000			200,000

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 40 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.

Answer 1

2017
Net income		230000
Less: Unrealized profit in closing stock
Inventory remains in stock	72000
Profit included in above stock		27000
		203000
Less: Dividend declared		43000
		160000
Share of Cogan		128000

2018
Net income		210000
Less: Unrealized profit in closing stock
Inventory remains in stock	80000
Profit included in above stock		30000
		180000
Less: Dividend declared		53000
		127000
Share of Cogan		101600

At the date of acquisition
Smash
common stock	780000
Retained earnings	330000
	1110000
Share of Cogan	888000
Cost of acquisition	1080000
Goodwill on the date of acquisition	192000
Annual amortization for goodwill
Goodwill on the date of acquisition	192000
Useful life	20 years
Annual amortization for goodwill
2017	9600
2018	9600

Value of investment as on December 31, 2017
On the date of acquisition
Investment in equity	888000
Goodwill on the date of acquisition	192000
	1080000
Add: share of profit 2017 net of dividend	128000
	952000
Less: Amortization of goodwill	9600
	942400

Value of investment as on December 31, 2018
On the date of acquisition
Investment carrying value	942400
Add: share of profit 2017 net of dividend	101600
	1044000
Less: Amortization of goodwill	9600
	1034400