Question

On January 1, 2020, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,225,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $860,000, retained earnings of $410,000, and a noncontrolling interest fair value of $525,000. 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	$	310,000		$	51,000		$	260,000
2021		290,000			61,000			280,000

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 30 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
2. Prepare the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing.

Answer 1

ANSWER

Date	Account title & Explanation	Debit	Credit
	Common stock smashing	$   860,000
	Retained earnings smashing (Note-1)	$   898,000
	Investment in smashing		$        29,250
	Non controlling interest		$ 1,728,750

Note-1:

Details	Amount
Retained earnings as on Jan1, 2020	$   410,000
Add: Net income in 2020	$   310,000
Less: Dividend in 2020	$      51,000
	$   669,000
Add: Net income in 2021	$   290,000
Less: Dividend in 2021	$      61,000
Retained earnings as on Dec31, 2021	$   898,000

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