Question

Giant acquired all of Small’s common stock on January 1, 2017, 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, $32,500 of the fair-value price was attributed to undervalued land while $95,500 was assigned to undervalued equipment having a 10-year remaining life. The $72,000 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.

The following are individual financial statements for the year ending December 31, 2021. On that date, Small owes Giant $11,900. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,183,550	)		$	(462,500	)
Cost of goods sold		583,000				98,500
Depreciation expense		187,000				148,000
Equity in income of Small		(206,450	)			0
Net income	$	(620,000	)		$	(216,000	)
Retained earnings, 1/1/21	$	(1,720,000	)		$	(642,000	)
Net income (above)		(620,000	)			(216,000	)
Dividends declared		310,000				120,000
Retained earnings, 12/31/21	$	(2,030,000	)		$	(738,000	)
Current assets	$	439,750			$	334,000
Investment in Small		1,060,250				0
Land		526,000				260,000
Buildings (net)		390,000				432,000
Equipment (net)		739,000				294,000
Goodwill		0				0
Total assets	$	3,155,000			$	1,320,000
Liabilities	$	(875,000	)		$	(412,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(2,030,000	)			(738,000	)
Total liabilities and equities	$	(3,155,000	)		$	(1,320,000	)

1. How was the $206,450 Equity in Income of Small balance computed?
2. Determine the totals to be reported by this business combination for the year ending December 31, 2021.
3. Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2021.
4. If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2021, what journal entry would Giant make to record such impairment?

Equity in Income of Small 02 S 0

Answer 1

Solution ;

1.)

Equity accrual      216000

Less. Amortization expense    9550

Equity income of small           $ 206450

		Life	Annual excess amortization
Land	32500
Equipment	95500	10	9550
Goodwill	72000
Total	$200,000		$9550

2.)

Revenue	$ 1646050	(1183550 + 462500)
Cost of goods sold	$ 681500	(583000 + 98500)
Depreciation expense	$ 344550	(187000 + 148000 + 9550)
Equity in income in small	$ 0	The parent's income balance is removed and replace with small's individual revenue and expense a/c
Net income	$620000	Consolidated revenue - Consolidated income
Retained earnings 1/1/21	$1720,000	Parent's balance
Divident paid	$310,000	Parent's balance
Retained earnings 12/31/21	$2030000	Parent's balance + Consolidated net income - Consolidated dividends paid (1720000 + 620000 - 310000 )
Current assets	$761850	(439750 + 334000 - 11900)
Investment in small	0	The parent's assets are removed . And small's individual asset and liability a/c's can be brought into the consolidation .
Land	$818500	(526000 + 260000 + 32500)
Building	$822000	(390000 + 432000)
Equipment	$1080750	(739000 + 294000 + (95500 - (9550 * 5)))
Goodwill	$72000	Original price allocation
Total assets	$3555100	Sum of all consolidated assets
Liabilities	$1275100	(875000 + 412000 - 11900)
Common stock	$250000	Parent's balance
Retained earnings	$2030000
Total liabilities and equity	$3555100	Sum of all consolidated liabilities and equity

3.)        GIANT COMPANY AND SMALL COMPANY

                   Consolidation Worksheet

                  For year ending December 31 , 2021

Account	Giant	Small	Debit	Credit	Consolidated totals
Revenue	(1183550)	(462500)			(1646050)
Cost of goods sold	583000	98500			681500
Depreciation expense	187000	148000	9550		344550
Equity income of small	(206450)	0	(206450)		0
Net income	(620000)	(216000)			(620000)
Retained earnings 1/1/21	(1720000)	(642000)	642000		(1720000)
Net income (above)	(620000)	(216000)			(620000)
Divident declared	310000	120000		120000	310000
Retained earnings 12/31/21	(2030000)	(738000)			(2768000)
Current assets	439750	334000		11900	761850
Investment in Small	1060250	0	120000	940250	0
Land	526000	260000	32500		818500
Building	390000	432000			822000
Equipment	739000	294000	95500	47750	1080750
Goodwill	0	0	72000		72000
Total assets	3155000	1320000			3555100
Liabilities	(875000)	(412000)	11900		(1275100)
Common stock	(250000)	(170000)	170000		(250000)
Retained earnings(above)	(2030000)	(738000)			(2030000)
Total liabilities and equity	3155000	1320000			3555100

4.)   Giant company General Journal

       Goodwill impairment loss a/c      dr     72000

              To Investment in small                             72000