On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting
ID: 2512055 • 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.
Prepare entry TI
Prepare entry G
Net Income
Dividends Declared
Inventory Purchases from Corgan
2017
$
300,000
$
50,000
$
250,000
2018
280,000
60,000
270,000
Explanation / Answer
Entry Particulars Year 2017 Year 2018 Debit Credit Debit Credit TI Sales $2,50,000 $2,70,000 Cost of Goods Sold $2,50,000 $2,70,000 To eliminate effects of intra entity inventory transfers G Cost of Goods Sold $93,750 $1,01,250 Inventory $93,750 $1,01,250 To remove unrealized gross profit created by intra-entity sale. Workings: Yr 2017 Yr 2018 Inventory Purchase from Corgan $2,50,000 $2,70,000 Markup percentage on cost 60% 60% Markup on cost (Inventory cost x 60/160) $93,750 $1,01,250
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