On January 1, 2014, Corgan Company acquired 80 percent of the outstanding voting

Question

On January 1, 2014, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,440,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $870,000, retained earnings of $420,000, and a noncontrolling interest fair value of $360,000. Corgan attributed the excess of fair value over Smashing’s book value to various covenants with a 20-year 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 2014 and 2015, 40 percent of the current year purchases remain in Smashing’s inventory.

Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as of December 31, 2015.

Prepare the worksheet adjustments for the December 31, 2015, consolidation of Corgan and Smashing. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Net Income Dividends Inventory Purchases from Corgan   2014 $ 320,000 $ 52,000 $ 270,000   2015 300,000 62,000 290,000

     Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2014 and 2015, 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, 2015.

b.

Prepare the worksheet adjustments for the December 31, 2015, consolidation of Corgan and Smashing. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Calculation of valuation of Corgons Investment As on 01st jan 2014 1290000 Add:Retained earning for the year 2014- W.N.1 200500 Add:Retained earning for the year 2015 - W.N.2 165500 366000 1656000 Value of Corgons investments 80 % 1324800 Workings Samashing Inc as on 1st jan 2014 Common Stock 870000 Retained earnings 420000 1290000 Working note 1 Calauclation of retained earning in the Year 2014 opening balance 420000 Add: NetIncome of 2014 320000 Less: Dividend 52000 Less:Unrealised profit 67500 200500 (2700000*.40)*100/160 Taotal 620500 Working note 2 Calauclation of retained earning in the Year 2015 opening balance 620500 Add: NetIncome of 2015 300000 Less: Dividend 62000 Less:Unrealised profit 72500 165500 (2900000*.40)*100/160 Total 786000

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