Question

On January 1, 2020, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,600,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $910,000, retained earnings of $460,000, and a noncontrolling interest fair value of $400,000. 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
2020	$	360,000		$	56,000		$	310,000
2021		340,000			66,000			330,00

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 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, 2021.
2. Prepare the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing.

   Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2021.

   	Investment balance 12/31/21

Prepare the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

No	Transaction	Accounts	Debit	Credit
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

1)
Consideration transferred by Corgan	$1,600,000.
Noncontrolling interest fair value	$400,000.
Smashing’s acquisition-date fair value	$2,000,000.
Less: Book value of subsidiary ($910,000 + $460,000)	$1,370,000.
Excess fair over book value	$630,000.
Excess assigned to covenants	$630,000.
Useful life in years	÷ 20
Annual amortization	$31,500.
2020 Ending Inventory Profit Deferral
Cost = $310,000 ÷ (1 + 60%) =	$193,750.
Intercompany Gross profit = $310,000 – $116,250 =	$116,250.
Ending inventory gross profit = $116,250 × 40%	$46,500.
2021 Ending Inventory Profit Deferral
Cost = $330,000 ÷ (1+ 60%) =	$206,250.
Intercompany Gross profit = $330,000 - $206,250	$113,750.
Ending inventory gross profit = $113,750 × 40% =	$45,500.
a.  Investment account:
Consideration transferred, January 1, 2020		$1,600,000.
Smashing’s 2020 income × 80% ($360,000 x 80%)	$288,000.
Covenant amortization (31,500 × 80%)	-$25,200.
Ending inventory profit deferral (100%)	-$46,500.
Equity in Smashing’s earnings		$216,300.
2020 dividends ($56,000 x 80%)		-$44,800.
Investment balance 12/31/20		$1,771,500.
Smashing’s 2021 income × 80% ($340,000 x 80%)	$272,000.
Covenant amortization (31,500 × 80%)	$25,200.
Beginning inventory profit recognition	$46,500.
Ending inventory profit deferral (100%)	-$45,500.
Equity in Smashing’s earnings		$298,200.
2021 dividends (66000 x 80%)		-$52,800.
Investment balance 12/31/21		$245,400.
b)
A. Prepare entry *G
Consolidating Entries	Debit	Credit
Investment in Smashing	$46,500.00
Cost of goods sold		$46,500.00
B. Prepare entry S
Common stock - Smashing	$910,000.00
Retained earnings - Smashing ($460,000 + $360000 - 56000)	$764,000.00
Investment in Smashing ($910,000 + $764000) x 80%		$1,339,200.00
Non controlling interest (balancing)		$334,800.00
C. Prepare entry A
Covenants ($630,000 - $31,500)	$598,500.00
Investment in Smashing $598,500 x 80%		$478,800.00
Non controlling interest (balancing)		$119,700.00
D.  Prepare entry I
Equity in earnings of S	$206,250.
Investment in S		$206,250.
E.  Prepare entry D
Investment in S (66000 x 80%)	52800
Dividends paid		52800
F.  Prepare entry E
Amortization expense	$31,500.
Covenants		$31,500.
G.  Prepare entry TI
Sales	330000
COGS		330000
H.  Prepare entry G
COGS	$45,500.
Inventory		$45,500.