On January 1, 2017, Corgan Company acquired 80 percent of the outstanding voting
ID: 2579760 • 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.
(1) Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.
Investment balance 12/31/18
(2) Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.
(a) Prepare entry *G
(b) Prepare entry S
(c) Prepare entry A
(d) Prepare entry I
(e) Prepare entry D
(f) Prepare entry E
(g) Prepare entry TI
(h) Prepare entry G
Net Income Dividends Declared Inventory Purchases from Corgan 2017 $ 380,000 $ 58,000 $ 330,000 2018 360,000 68,000 350,000Explanation / Answer
1) Consideration transferred by Corgan $1,680,000 Noncontrolling interest fair value $420,000 Smashing’s acquisition-date fair value $2,100,000 Less: Book value of subsidiary ($930,000 + $480,000) $1,410,000 Excess fair over book value $690,000 Excess assigned to covenants $690,000 Useful life in years ÷ 20 Annual amortization $34,500 2017 Ending Inventory Profit Deferral Cost = $330,000 ÷ (1 + 40%) = $206,250 Intercompany Gross profit = $330,000 – $206,250 = $123,750 Ending inventory gross profit = $123,750 × 40% = $15,000 $49,500 2018 Ending Inventory Profit Deferral Cost = $350,000 ÷ (1+ 60%) = $218,750 Intercompany Gross profit = $350,000 - $218,750 $131,250 Ending inventory gross profit = $131,250 × 40% = $52,500 a. Investment account: Consideration transferred, January 1, 2017 $16,800,000 Smashing’s 2017 income × 80% ($380,000 x 80%) $304,000 Covenant amortization (34,500 × 80%) -$27,600 Ending inventory profit deferral (100%) -$49,500 Equity in Smashing’s earnings $226,900 2017 dividends ($58,000 x 80%) -$46,400 Investment balance 12/31/17 $16,980,500 Smashing’s 2018 income × 80% ($360,000 x 80%) $288,000 Covenant amortization (34,500 × 80%) $27,600 Beginning inventory profit recognition $49,500 Ending inventory profit deferral (100%) -$52,500 Equity in Smashing’s earnings $312,600 2018 dividends (68000 x 80%) -$54,400 Investment balance 12/31/18 $258,200