Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,540,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $950,000, retained earnings of $500,000, and a noncontrolling interest fair value of $660,000. 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	$	400,000		$	60,000		$	350,000
2018		380,000			70,000			370,000

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.) Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.

B.) Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

Consolidation Worksheet Entries

• Prepare entry G

Note: Enter debits before credits.

	Transaction Accounts Debit Credit 8

• Required A

(Please give me the Considaltion worksheet entries for entries G, S, A, I, D, E, TI, G

Answer 1

The consolidated worksheet entries are prepared as below:

Transaction	Consolidating Entries	Debit	Credit
1) Prepare Entry *G
1	Investment in Smashing	$39,375
	Cost of Goods Sold		$39,375
2) Prepare Entry S
2	Common Stock-Smashing	$950,000
	Retained Earnings-Smashing	$840,000
	Investment in Smashing		$1,253,000
	Noncontrolling Interest		$537,000
2) Prepare Entry A
3	Covenants	$712,500
	Investment in Smashing		$498,750
	Noncontrolling Interest		$213,750
4) Prepare Entry I
4	Equity in Earnings of Smashing	$237,500
	Investment in Smashing		$237,500
5) Prepare Entry D
5	Investment in Smashing	$49,000
	Dividends Declared		$49,000
6) Prepare Entry E
6	Amortization Expense	$37,500
	Covenants		$37,500
7) Prepare Entry TI
7	Sales	$370,000
	Cost of Goods Sold		$370,000
8) Prepare Entry G
8	Cost of Goods Sold	$41,625
	Inventory		$41,625

_____

Notes:

The computation of various items is shown as below:

1)

Annual Amortization Expense:

Consideration Transferred by Corgan	1,540,000
Add Non Controlling Interest- Fair Value	660,000
Smashing's Acquisition-Date Fair Value	2,200,000
Book Value of Subsidiary	1,450,000
Excess of Fair Value Over Book Value Assigned to Covenants	750,000
Annual Amortization (750,000/20)	$37,500

_____

2)

Ending Year Profit Deferral (2017):

Cost = 350,000/1.6 = $218,750

Intra-Entity Gross Profit = 350,000 - 218,750 = $131,250

Ending Inventory Gross Profit = 131,250*30% = $39,375

_____

Ending Year Profit Deferral (2018):

Cost = 370,000/1.6 = $231,250

Intra-Entity Gross Profit = 370,000 - 231,250 = $138,750

Ending Inventory Gross Profit = 138,750*30% = $41,625

_____

3)

Equity in Smashing's Earnings:

Smashing's 2018 Net Income (380,000*70%)	266,000
Less Covenant Amortization (37,500*70%)	26,250
Add Beginning Inventory Profit Recognition	39,375
Less Ending Inventory Profit Deferral	41,625
Equity in Smashing's Earnings	$237,500