Question

on january 1, 2020, corgan company acquired 80 percent of the outstanding voting stock of smashing, inc., for a total of $980,000 in cash and other consideration. at the acquisition date, smashing had common stock of $700,000, retained earnings of $250,000, and a noncontrolling interest fair value of $245,000. 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 2020 $ 150,000 $ 35,000 $ 100,000 2021 130,000 45,000 120,000 corgan sells inventory to smashing using a 60 percent markup on cost. at the end of 2020 and 2021, 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, 2021. prepare the worksheet adjustments for the december 31, 2021, consolidation of corgan and smashing.

Answer 1

The equity method balance in Corgan's investment in Smashing, Inc., account as of December 31, 2021, is -16,000. The calculations involve multiplying the net income, dividends, and inventory purchases by the ownership percentage and adding them together. For the worksheet adjustments, more specific details are needed.

Step-by-step explanation:

To calculate the equity method balance in Corgan's investment in Smashing, Inc. account as of December 31, 2021, we need to consider the net income, dividends, and inventory purchases for the two years.

Calculate the equity in net income by multiplying the net income of each year by the ownership percentage (80% of the outstanding stock) and adding them together. In this case, it would be (150,000 + 130,000) x 0.8 = 224,000.

Calculate the dividends received by multiplying the dividends declared by the ownership percentage and adding them together. In this case, it would be (35,000 + 45,000) x 0.8 = 64,000.

Calculate the equity in inventory purchases by multiplying the purchases made from Corgan by the ownership percentage and adding them together. In this case, it would be (100,000 + 120,000) x 0.8 = 176,000.

The equity method balance in Corgan's investment in Smashing, Inc. account as of December 31, 2021, is calculated by subtracting the dividends received and the equity in inventory purchases from the equity in net income. In this case, it would be 224,000 - 64,000 - 176,000 = -16,000 (a negative balance).

As for the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing, Inc., please provide more specific details about what adjustments you are referring to.

Answer 2

the answer is

Step-by-step explanation:

Downstream intra-entity profit adjustments when parent uses equity method and a noncontrolling interest is present)​Consideration transferred by Corgan​ ​$980,000​

Noncontrolling interest fair value​​245,000​

Smashing’s acquisition-date fair value​​1,225,000​

Book value of subsidiary ​​​950,000​

Excess fair over book value​​​275,000

Excess assigned to covenants​ ​ 275,000​

Remaining useful life in years​ ​ ÷ 20 ​Annual amortization​ $13,750 ​2020 Ending Inventory Profit Deferral▪ Cost = $100,000 ÷ 1.6 = $62,500▪

Intra-entity gross profit = $100,000 – $62,500 = $37,500▪

Ending inventory gross profit = $37,500 × 40% = $15,000 ​2021 Ending Inventory Profit Deferral ▪ Cost = $120,000 ÷ 1.6 = $75,000▪ Intra-entity gross profit = $120,000 – $75,000 = $45,000▪ Ending inventory gross profit = $45,000 ´ 40% = $18,000​ ​a. Investment account:​​​​Consideration transferred, January 1, 2020​​$980,000​​​Smashing’s 2020 net income (150,000× 80%)​$120,000​​​​Covenant amortization (13,750 × 80%)​(11,000)​​​​Ending inventory profit deferral (100%)​ (15,000)​​​Equity in Smashing’s earnings​​94,000​​2020 dividends (35,000*80%)​​ (28,000)​​Investment balance 12/31/20​​$1,046,000​​​Smashing’s 2021 net income (130,000× 80%)​$104,000​​​​Covenants amortization (13,750 × 80%)​(11,000)​​​​Beginning inventory profit recognition​15,000​​​​Ending inventory profit deferral (100%)​ (18,000)​​​​Equity in Smashing’s earnings​​90,000​​ 2021 dividends (45,000*80%)​​ (36,000)​​Investment balance 12/31/21​​$1,100,000

b. 12/31/21 Worksheet Adjustments

Entry *G

​Investment in Smashing​15,000​​​

Cost of goods sold​​ 15,000

​​​​​Entry S

Common stock—Smashing​ 700,000​​

Retained earnings—Smashing​365,000​​​

Investment in Smashing​​852,000​​

Noncontrolling interest​​213,000

Entry A

​Covenants​​261,250​​​
Investment in Smashing​​209,000

​​Noncontrolling interest​​52,250

Entry I​

Equity in earnings of Smashing (above)​90,000​​​

Investment in Smashing​​90,000​

Entry D​ ​Investment in Smashing ​36,000​​​

Dividends declared​​36,000 (45,000*80%)

Entry E

Amortization expense​13,750​​

Covenants​​13,750​​​​​

Entry TI Sales​​​​ 120,000​​​ Cost of goods sold​​ 120,000

Entry G​

Cost of goods sold​​18,000​​​ Inventory​​18,000