On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting
ID: 2512038 • Letter: O
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
Net Income
Dividends Declared
Inventory Purchases from Corgan
2017
$
300,000
$
50,000
$
250,000
2018
280,000
60,000
270,000
Explanation / Answer
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 + $37,500) $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