Answered: Compute the equity method balance in…

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter18: Accounting Periods And Methods

Section: Chapter Questions

Problem 67P

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On January 1, 2017, 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.

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.

Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as of December 31, 2018.

Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

Smashing.
During the next two years, Smashing reported the following:
Net
Dividends
Income
Declared
Inventory Purchases from Corgan
$150,000
130,000
$35,000
45,000
$100,000
120,000
2017
2018
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018,
40 nercent of the current vear purchases remain in Smashing's inventory

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