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:

	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.

A. Prepare entry *G

B. Prepare entry S

C. Prepare entry A

Answer 1

A. Prepare entry *G
Consolidating Entries	Debit	Credit
Investment in Smashing	$46,875.00
Cost of goods sold		$46,875.00
B. Prepare entry S
Common stock - Smashing	$850,000.00
Retained earnings - Smashing ($400,000 + $46,875)	$446,875.00
Investment in Smashing ($850,000 + $437,500) x 70%		$907,812.50
Non controlling interest (balancing)		$389,062.50
C. Prepare entry A
Covenants ($450,000 - $22,500)	$427,500.00
Investment in Smashing $427,500 x 80%		$342,000.00
Non controlling interest (balancing)		$85,500.00
A)
2017 Ending Inventory Profit Deferral
Cost = $250,000 ÷ 1.6 =	$156,250.00
Intra-entity gross profit = $250,000 - $156,250	$93,750.00
Ending inventory gross profit =$93,750 x 50%	$46,875.00
C)
Consideration transferred by Corgan	$1,190,000.00
Noncontrolling interest fair value	$510,000.00
Smashing’s acquisition-date fair value	$1,700,000.00
Book value of subsidiary ($850,000 + $400,000)	$1,250,000.00
Excess fair over book value	$450,000.00
Excess assigned to covenants	$450,000.00
Remaining useful life in years	÷20
Annual amortization	$22,500.00