On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting
ID: 2579088 • Letter: O
Question
On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,680,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $930,000, retained earnings of $480,000, and a noncontrolling interest fair value of $420,000. 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:
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 40 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 I (income) for the December 31, 2018, consolidation of Corgan and Smashing.
Net Income Dividends Declared Inventory Purchases from Corgan 2017 $ 380,000 $ 58,000 $ 330,000 2018 360,000 68,000 350,000Explanation / Answer
Answer:
a) Computation of the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.
Thus, Investment balance of Corgon as on Dec31, 2018 = $2,063,500
b) Prepare the worksheet adjustments I (income) for the December 31, 2018, consolidation of Corgan and Smashing.
Explanation a Consideration transferred by Corgan 1,680,000 b Noncontrolling interest fair value 420,000 c Smashing’s acquisition-date fair value (a+b) 2,100,000 d Book value of subsidiary (930,000 + 480,000) 1,410,000 e Excess fair over bookvalue (c-d) 690,000 f Excess assigned to covenants 690,000 g Useful life in years 20 years Annual amortization (f/g) 34,500 2017 Ending Inventory Profit Deferral Cost (330,000 /1.6) (As it is 60% markup on cost) 206,250 Intra Entity Gross Profit ($330,000 - 206,250) 123,750 Ending Inventory Gross Profit (as 40% of the inventory is in closing stock) (So , $123,750 * 40%) 49,500 2018 Ending Inventory Profit Deferral Cost (350,000 /1.6) (As it is 60% markup on cost) 218,750 Intra Entity Gross Profit ($350,000 - 218,750) 131,250 Ending Inventory Gross Profit (as 40% of the inventory is in closing stock) (So , $131,250 * 40%) 52,500