Question

Giant acquired all of Small’s common stock on January 1, 2014, in exchange for cash of $770,000. On that day, Small reported common stock of $170,000 and retained earnings of $400,000. At the acquisition date, $34,500 of the fair-value price was attributed to undervalued land while $99,000 was assigned to undervalued equipment having a 10-year remaining life. The $66,500 unallocated portion of the acquisition-date excess fair value over book value was viewed as goodwill. Over the next few years, Giant applied the equity method to the recording of this investment.

Following are individual financial statements for the year ending December 31, 2018. On that date, Small owes Giant $14,800. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,222,400	)		$	(477,000	)
Cost of goods sold		585,000				97,000
Depreciation expense		173,500				208,000
Equity in income of Small		(162,100	)			0
Net income	$	(626,000	)		$	(172,000	)
Retained earnings, 1/1/18	$	(1,240,000	)		$	(655,000	)
Net income (above)		(626,000	)			(172,000	)
Dividends declared		300,000				110,000
Retained earnings, 12/31/18	$	(1,566,000	)		$	(717,000	)
Current assets	$	216,500			$	337,000
Investment in Small		1,037,500				0
Land		427,000				257,000
Buildings (net)		287,000				436,000
Equipment (net)		725,000				310,000
Goodwill		0				0
Total assets	$	2,693,000			$	1,340,000
Liabilities	$	(877,000	)		$	(453,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(1,566,000	)			(717,000	)
Total liabilities and equities	$	(2,693,000	)		$	(1,340,000	)

1. How was the $162,100 Equity in Income of Small balance computed?
2. Determine the totals to be reported by this business combination for the year ending December 31, 2018.
3. Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2018.
4. If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2018, what journal entry would Giant make to record such impairment?

Answer 1

1)

AS PER EQUITY METHOD

Undervalued Land=

Undervalued Equipment=10 years remaining life

AMORTIZATION = EQUIPMENT VALUE / YEARS

= 99000/10

= $9900

EQUITY = NET INCOME OF SMALL - AMORTIZATION

= $ 172000 - $ 9900  

= $ 162100