Question - On January 1, 2010, 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 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 Inventory Purchases from Corgan
2010 $ 150,000 $ 35,000 $ 100,000
2011 130,000 45,000 120,000
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2010 and 2011, 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, 2011.
(b) Prepare the worksheet adjustments for the December 31, 2011, consolidation of Corgan and Smashing.