Equity Method

Question 1:

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.

  1. Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as of December 31, 2018.
  2. Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

Required A:

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

Investment balance 12/31/18 $______________

Required B:

Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing. (If no entry required for a transaction/event, select “No journal entry required” in the firs account field.

1

1

Investment in Smashing

Cost of goods sold

2

2

Common stock – Smashing

Retained earnings – Smashing

Investment in Smashing

Noncontrolling interest

3

3

Covenants

Investment in Smashing

Noncontrolling interest

4

4

Equity in earnings of Smashing

Investment in Smashing

5

5

Investment in Smashing

Dividends declared

6

6

Amortization expense

Covenants

7

7

Sales

Cost of goods sold

8

8

Cost of goods sold

Inventory

Question 2:

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $472,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft’s identifiable assets and liabilities at a collective net fair value of $695,000 and the fair value of the 20 percent noncontrolling interest was $118,000. No excess fair value over book value amortization accompanied the acquisition.

The following selected account balances are from the individual financial records of these two companies as of December 31, 2018:

Protrade

Seacraft

Sales

$

810,000

$

530,000

Cost of goods sold

375,000

282,000

Operating expenses

167,000

122,000

Retained earnings, 1/1/18

910,000

350,000

Inventory

363,000

127,000

Buildings (net)

375,000

174,000

Investment income

Not given

0

Each of the following problems is an independent situation:

  1. Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost. Intra-entity transfers were $107,000 in 2017 and $127,000 in 2018. Of this inventory, Seacraft retained and then sold $45,000 of the 2017 transfers in 2018 and held $59,000 of the 2018 transfers until 2019.
    Determine balances for the following items that would appear on consolidated financial statements for 2018:
  2. Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $67,000 in 2017 and $97,000 in 2018. Of this inventory, $38,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $52,000 of the 2018 transfers were held until 2019.
    Determine balances for the following items that would appear on consolidated financial statements for 2018:
  3. Protrade sells Seacraft a building on January 1, 2017, for $114,000, although its book value was only $67,000 on this date. The building had a five-year remaining life and was to be depreciated using the straight-line method with no salvage value. Determine balances for the following items that would appear on consolidated financial statements for 2018:

a.

Cost of goods sold

Inventory

Net income attributable to noncontrolling interest

b.

Cost of goods sold

Inventory

Net income attributable to noncontrolling interest

c.

Buildings (net)

Operating expenses

Net income attributable to noncontrolling interest

Question 3:

Placid Lake Corporation acquired 70 percent of the outstanding voting stock of Scenic, Inc., on January 1, 2017, when Scenic had a net book value of $590,000. Any excess fair value was assigned to intangible assets and amortized at a rate of $7,000 per year.

Placid Lake’s 2018 net income before consideration of its relationship with Scenic (and before adjustments for intra-entity sales) was $490,000. Scenic reported net income of $300,000. Placid Lake declared $180,000 in dividends during this period; Scenic paid $59,000. At the end of 2018, selected figures from the two companies’ balance sheets were as follows:

Placid Lake

Scenic

Inventory

$

330,000

$

109,000

Land

790,000

390,000

Equipment (net)

590,000

490,000

During 2017, intra-entity sales of $170,000 (original cost of $80,000) were made. Only 10 percent of this inventory was still held within the consolidated entity at the end of 2017. In 2018, $280,000 in intra-entity sales were made with an original cost of $78,000. Of this merchandise, 20 percent had not been resold to outside parties by the end of the year.

Each of the following questions should be considered as an independent situation for the year 2018.

  1. What is consolidated net income for Placid Lake and its subsidiary?
  2. If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?
  3. If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?
  4. What is the consolidated balance in the ending Inventory account?
  5. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $49,000 to Placid Lake for $88,000. On the 2018 consolidated balance sheet, what value should be reported for land?

1.f-1. Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic. Instead, on January 1, 2017, Scenic sold equipment (that originally cost $180,000 but had a $79,000 book value on that date) to Placid Lake for $108,000. At the time of sale, the equipment had a remaining useful life of five years. What worksheet entries are made for a December 31, 2018, consolidation of these two companies to eliminate the impact of the intra-entity transfer?

2.f-2. For 2018, what is the noncontrolling interest’s share of Scenic’s net income?

Req A: What is consolidated net income for Placid Lake and its subsidiary?

Req B and C:

b. If the intra-entity sales were upstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?
c. If the intra-entity sales were downstream, how would consolidated net income be allocated to the controlling and noncontrolling interest?

Controlling Interest Non-controlling Interest

B. Upstream

Answer:

Answer:

C. Downstream

Answer:

Answer:

Req D and E:

What is the consolidated balance in the ending Inventory account?
e. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead, in 2017, Scenic sold land costing $49,000 to Placid Lake for $88,000. On the 2018 consolidated balance sheet, what value should be reported for land?

  • Consolidated Inventory

Answer:

  • Consolidated land balance

Answer:

Req F1

No

Transaction

Accounts

Debit

Credit

1

1

Retained earnings – Scenic

Equipment

Accumulated depreciation

2

2

Accumulated depreciation

Depreciation expense

Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic. Instead, on January 1, 2017, Scenic sold equipment (that originally cost $180,000 but had a $79,000 book value on that date) to Placid Lake for $108,000. At the time of sale, the equipment had a remaining useful life of five years. What worksheet entries are made for a December 31, 2018, consolidation of these two companies to eliminate the impact of the intra-entity transfer? (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)

Req F2

For 2018, what is the noncontrolling interest’s share of Scenic’s net income?

Net income attributable to noncontrolling interest $_Answer______________


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