Question

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,085,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $820,000, retained earnings of $370,000, and a noncontrolling interest fair value of $465,000. 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	$	270,000		$	47,000		$	220,000
2018		250,000			57,000			240,000

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.

1. Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.
2. Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

Answer 1

Corgan uses The Equity method to account
for Investement in Smashing
Corgan sells inventory to Smashing using 60% mark up
on cost
At the end of 2017 and 2018 , 50% of current year
purchase remain in Smashing Inventory
On Jan 1 ,2017 , Corgan Company acquired 70%
of outstanding Voting stock of Smashing
	Amnt$
Consideration transferred by Corgan -a	10,85,000
Non Controlling Interest- fair value -b	4,65,000	( As per question0
Acquisition date - fair value ( Samshing)(a+b)=C	15,50,000
Book value of Smashing ( Subsidiary Co)
Common stock	8,20,000
Retained Earnings	3,70,000
Total Book Value -D	11,90,000
Excess of fair value over book value	3,60,000
As per Question , the above excess allocated to covenanths -C1	3,60,000
usedul life year-D1	20
Annual Amortization (C1/D1)	18,000
Now treatement of Closing Stock wth mark Up
Year 2017 - Inventory purchase from Corgan	2,20,000	c2
Corgan sells inventory to Smashing using 60% mark up
So unrealised part include ($220000/1.60)	1,37,500	d2
Gross profit - Inter unrealised amount	82,500	(c2-d2)
As per Question , 50% of current year purchase remain in Stock
so 50% * $ 82500	41,250
Same above scenario need to repeat in 2018
Year 2017 - Inventory purchase from Corgan	2,40,000	c2
Corgan sells inventory to Smashing using 60% mark up
So unrealised part include ($240000/1.60)	1,50,000	d2
Gross profit - Inter unrealised amount	90,000	(c2-d2)
As per Question , 50% of current year purchase remain in Stock
so 50% * $ 90000	45,000
Now under Equity methid of accounting , Corgan Investment in Smashing Company
year 2017
	Amt $	Amt $
Corgan Company accquired 70% - Consideration transferred		10,85,000
Smashing Income $ 270000*70%	1,89,000
Less - Covenant amount( as calculated above )
with share of 70% $18000*70%	-12,600
Closing Inventory unreaslied Profit	-41,250
Net Equity of Smashing Income		1,35,150
		12,20,150
Less - 2017 70% of divided $ 47000		-32,900
Investment Balance as on 31st Dec 2017		11,87,250
year 2018
Smashing Income $ 250000*70%	1,75,000
Less - Covenant amount( as calculated above )
with share of 70% $18000*70%	-12,600
Opening Inventory unreaslied Profit	41,250
Closing Inventory unreaslied Profit	-45,000
Net Equity of Smashing Income		1,58,650
Less - 2017 70% of divided $ 57000		-39,900
Investment Balance as on 31st Dec 2018		1,18,750

Answer b	Worksheet Adjustment - Consoldation as on 31st Dec 2018	Debit$	Credit$
	Preparing Entry S
	Common Stock- Smashing	8,20,000
	Retained earnings	5,93,000
	$370000+$270000-$47000 ( Div)
	Investment in Smashing =70% * ( $820000+$593000)		9,89,100
	Non controlling Interest		4,23,900
	Preparing Entry A
	Covenant( $ 18000*19)	3,42,000
	Investment in Smashing =70% * $ 342000		2,39,400
	Non controlling Interest		1,02,600
	Preparing Entry D
	Investment in Smashing	39,900
	Dividend declared		39,900
	Preparing Entry I
	Equity Earnings - Samshine	1,58,650
	Investment in Samshine		1,58,650
	Preparing Entry G
	Investment in Samshine	41,250
	Cost of goods sold		41,250
	Preparing Entry E
	Amortization Expenses	18,000
	Covenant( $ 18000		18,000
	Preparing Entry T1
	Sals	2,40,000
	Cost of goods sold		2,40,000
	Preparing Entry G
	Cost of goods sold	45,000
	Inventory		45,000