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 $170,000 and retained earnings of $400,000. At the acquisition date, $58,500 of the fair-value price was attributed to undervalued land while $76,000 was assigned to undervalued equipment having a 10-year remaining life. The $65,500 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 owed Giant $10,600. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant	Small
Revenues	$(1,230,600)	$(520,000)
Cost of goods sold	578,000	131,000
Depreciation expense	198,000	206,000
Equity in income of Small	(175,400)	0
Net income	$(630,000)	$(183,000)
Retained earnings, 1/1/18	$(1,510,000)	$(657,000)
Net income (above)	(630,000)	(183,000)
Dividends declared	320,000	100,000
Retained earnings, 12/31/18	$(1,820,000)	$(740,000)
Current assets	$335,000	$258,000
Investments in Small	1,072,000	0
Land	483,000	193,000
Buildings (net)	336,000	497,000
Equipment (net)	685,000	362,000
Goodwill	0	0
Total assets	$2,911,000	$1,310,000
Liabilities	$(841,000)	$(400,000)
Common stock	(250,000)	(170,000)
Retained earnings (above)	(1,820,000)	(740,000)
Total liabilities and equities	$(2,911,000)	$(1,310,000)

1. How was the $175,400 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?

Required A

Equity accrual

Less: Amortization expense

Equity in Income of Small

Required B

Revenues

Cost of Goods sold

Depreciation expense

Income of Small

   Net Income

Retained earnings, 1/1/18

Dividends declared

   Retained earnings, 12/31/18

Current assets

Investment in Small

Land

Building (net)

Equipment (net)

Goodwill

   Total Assets

Liabilities

Common Stock

Retained earnings, 12/31/18

   Total liabilities and equity

Answer 1

a) Acquisition date fair value allocation 1/1/2014 Life Amortization per year (a/b Amount (a Items Land Equipment Goodwill 58,500 76,000 65,500 200,000 10 7,600 7,600 Equity Accrual Less: Amortization Expenses Equity in Income of Small 183,000 (7,600) 175,400 Value as on 1/1/2018 Total Amortization of Equipment from 1/1/2014- 12/31/2017 (7,600* 4) 30,400 Value of Equipment as on 1/1/2018 Equipment as on 1/1/2014 Less: Amortization from 1/1/2014 31/12/2017 Equipment as on 1/1/2018 Less: Amortization during the year 2018 Equipment as on 12/31/2018 76,000 30,400 45,600 7,600) 38,000

b) Combined Totals Giant Small Adjustment Combined Remarks 1,230,600 578,000 520,000) 131,000 (1,750,600) Both the balances are combined together 709,000 Both the balances are combined together Revenues Cost of goods sold Both the balances are combined together along with the Depreciation Expenses 198,000 206,000 7,600 411,600 ladditional depreciation on equipment It has to be removed and replaced with small's revenue and expenses accounts Consolidated Expenses subtracted from Consolidated Equity in income o small 175,400 175,400 Net Income 630,000 1,510,000 183,000 657,000 (630,000) Income Retained Earnings 1/1 657,000(1,510,000) Only Parent's retained earning to be reported Dividend declared by small should be eliminitated because Dividends paid 100,000 740,000 (100,000 320,000 1,820,000 320,000 of Inter company dividend 1,820,000) Only Parent's retained earning to be reported Retained Earnings 12/31 Both the balances are combined together and subtracting the Current Assets 335,000 258,000 10,600 582,400 inter company dues Investment in small account removed and replaced with assets and liabilities of Giant Both the balances are combined together along with the Investment in small 1,072,000 1,072,000 Land Buildin 483,000 336,000 193,000 497,000 58,500 734,500 purchase price allocation 833,000 Both the balances are combined together Both the balances are combined together along with the Equipment Goodwill Total Assets б85, 000 362,000 38,0001,085,000 purchase price allocation less amortization till date 65,500 65,500 Purchase Price allocation 3,300,400 Added all the combined assets 2,911,0001,310,000 Both the balances are combined together and subtracting the Liabilities Common stock Retained Earnings 12/31 Total Liabilites and equit 1,230,400) inter com (250,000) Only Parent Balance to be reported 1,820,000) Only Parent Balance to be reported 3,300,400) Added all the combined liabilities dues 841,000 250,000 1,820,000 400,000 170,000 740,000 2,911,000(1,310,000 10,600 170,000 740,000

GIANT COMPANY AND SMALL COMPANY Consolidation Worksheet For the year ending 31 December, 2018 Adjustment Ent Giant Small Dr Cr Consolidated Total Revenues Cost of goods sold Depreciation Expenses Equity in income of Small Net Income (1,230,600) 578,000 198,000 (175,400) (630,000) 520,000) 131,000 206,000a] 1,750,600 709,000 411,600 7,600 175,400 (183,000) (630,000) Retained Earnings 1/1 Net Income Dividend paid Retained Earnings 12/31 (1,510,000) (630,000) 320,000 (1,820,000) (657,000) e] (183,000) 100,000 (740,000) 657,000 1,510,000 630,000 320,000 (1,820,000) 100,000[c]

10,600 [Pay] 75,400 [c] Current Assets 335,000 1,072,000 258,000 582,400 Investment in small 827,000[e] 169,600 [a] Land Buildings (net Equipment (net Goodwill Total Assets 483,000 336,000 685,000 193,000 [a] 497,000 362,000 [a] 58,500 734,500 833,000 1,085,000 65,500 3,300,400 7,600 [e] 45,600 65,500 2,911,000 1,310,000 Liabilities Common Stock Retained Earnings (above) Total Liabilities and equity (400,000) [Pay] (170,000)l [e] (740,000) (1,230,400) 250,000) (1,820,000) (3,300,400) 841,000 250,000 10,600 170,000 (1,820,000) (2,911,000)(1,310,000) 1,190,200 1,190,200 Entries Explanatioin [c] it is to eliminate the equity investment balance from equity income and share in dividend income as on 12/31/18 [el it is to eliminate the equity investment from the share in the book value of sierra 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 [d] it is to record amortization of excess value assets and liabilities during the year 2018 [Payl it is eliminate the inter company dues Required d) Journal Entry for Goodwill Impairment Account titles and explanantion Debit Credit Goodwill Impairment Loss Investment in small (to recored impairment of goodwill) 65,500 65,500