Question

Glant 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, $46,500 of the fair-value price was attributed to undervalued land while $86,000 was assigned to undervalued equipment having a 10-year remaining life. The $67,500 unallocated portion of the acquisition date excess fair value over book value was viewed as goodwill. Over the next few years, Glant 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, Smallowes Giant $14,900. Small declared and paid dividends in the same period. Credits are indicated by parentheses. $ Small (488,000) 135,000 131,000 S $ Giant $(1, 239, 100) 642,000 213,500 (213,400) $ (597,000) $(1,260,000) (597,000) 310,000 $11,547,000) $ 166,000 1,169,000 405,000 264,000 651,000 (222,000) (710,000) (222,000) 90,000 (842,000) 331,000 Revenues Cost of goods sold Depreciation expense Equity in income of Small Net income Retained earnings, 1/1/18 Net income (above) Dividends declared Retained earnings, 12/31/18 Current assets Investment in Small Land Buildings (net) Equipment (net) Goodwill Total assets Liabilities common stock Retained earnings (above) Total liabilities and equities $ $ 227,000 490,000 363.000 $ 2,655,000 5 1,411,000 $ (858,000) $ (399,000) (250,000) (170,000) (1,547,000). (842,000) $(2,655,000) $(1,411,000)

Answer 1

a) Equity in Income of Small Equity Accrual Less: Amortization Expenses Equity in Income of Small 222,000 (8,600) 213,400 Working Notes Amount Life (b) Amortization per year (a/b) Items Land Equipment Goodwill 108 ,600 46,500 86,000 67,500 200,000 8,600

b) Combined Totals Giant Revenues Cost of goods sold Small Adjustment (1,239,100) (488,000) 642,000 135,000 Depreciation Expenses 213,500 131,000 Equity in income of small Net Income Retained Earnings 1/1 (213,400) (597,000) (1,260,000) (222,000) (710,000) Dividends paid Retained Earnings 12/31 310,000 (1,547,000) 90,000 (842,000) Current Assets 166,000 331,000 Combined Remarks (1,727,100) Both the balances are combined together 777,000 Both the balances are combined together Both the balances are combined together along with the additional 8,600 353,100 depreciation on equipment It has to be removed and replaced with small's revenue and expenses 213,400 accounts (597,000) Consolidated Expenses subtracted from Consolidated Income 710,000 (1,260,000) Only Parent's retained earning to be reported Dividend declared by small should be eliminitated because of Inter (90,000) 310,000 company dividend (1,547,000) Only Parent's retained earning to be reported Both the balances are combined together and subtracting the inter (14,900) 482,100 company dues Investment in small account removed and replaced with assets and (1,169,000) liabilities of Giant Both the balances are combined together along with the purchase 46,500 678,500 price allocation 754,000 Both the balances are combined together Both the balances are combined together along with the purchase 43,000 1,057,000 price allocation less amortization till date 67,500 67,500 Purchase Price allocation 3,039,100 Added all the combined assets Both the balances are combined together and subtracting the inter 14,900 (1,242,100) company dues 170,000 (250,000) Only Parent Balance to be reported 842,000 (1,547,000) Only Parent Balance to be reported (3,039,100) Added all the combined liabilities Investment in small 1,169,000 Land Buildings 405,000 264,000 227,000 490,000 651,000 363,000 Equipment Goodwill Total Assets 2,655,000 1,411,000 Liabilities Common stock Retained Earnings 12/31 Total Liabilites and equity (858,000) (250,000) (1,547,000) (2,655,000) (399,000) (170,000) (842,000) (1,411,000)

Working Notes: Calculation of Value of Unamortized value of excess value as on 01/01/18 to 12/31/18 Equipment as on 1/1/2014 86,000 Less: Amortization from 1/1/2014 - 31/12/2017 34,400 Equipment as on 1/1/2018 51,600 Less: Amortization during the year 2018 (8,600) Equipment as on 12/31/2018 43,000 1* Total Amortization of Equipment from 1/1/2014 - 12/31/2017 (8,600 x 4) = 34,400

GIANT COMPANY AND SMALL COMPANY Consolidation Worksheet For the year ending 31 December, 2018 Adjustment Entry Giant Small Dr. Cr. (1,239,100) (488,000) 642,000 135,000 213,500 131,000 [e] 8,600 (213,400) 213,400 (597,000) (222,000) Revenues Cost of goods sold Depreciation Expenses Equity in income of Small Net Income Consolidated Total (1,727,100) 777,000 353,100 il (597,000) 710,000 Retained Earnings 1/1 Net Income Dividend paid Retained Earnings 12/31 (1,260,000) (597,000) 310,000 (1,547,000) (710,000) [s] (222,000) 90,000 (842,000) (1,260,000) (597,000) 310,000 (1,547,000) 90,000 [d] 331,000 482,100 Current Assets Investment in small 166,000 1,169,000 [d] 90,000 14,900 (pay] 213,400 [i] 880,000 [s] 165,600 [a] [a] 46,500 Land Buildings (net) Equipment (net) Goodwill Total Assets 405,000 264,000 651,000 227,000 490,000 363,000 - 1,411,000 8,600 [e] [a] [a] 51,600 67,500 678,500 754,000 1,057,000 67,500 3,039,100 2,655,000

14,900 170,000 Liabilities Common Stock Retained Earnings (above) Total Liabilities and equity (858,000) (250,000) (1,547,000) (2,655,000) (399,000) (pay] (170,000) [s] (842,000) (1,411,000) (1,242,100)| (250,000) (1,547,000) (3,039,100) 1,372,500 1,372,500 Entries Explanation [i] it is to eliminate the equity investment balance from equity income. [d] it is to eliminate the intra company dividend as on 12/31/18 [s] it is to eliminate the equity investment from the share in the book value of small as on 1/1/18 [a] it is to record the excess value of assets acquired on the date of acquisition as on 1/1/18 [e] it is to record amortization of excess value assets and liabilities during the year 2018 [pay] it is eliminate the inter company dues Required d) Journal Entry for Goodwill Impairment Debit Credit 67,500 Account titles and explanantion Goodwill Impairment Loss Investment in small (to recored impairment of goodwill) 67,500