Giant acquired all of Small’s common stock on January 1,2009. Over the next few years, Giant applied the equity method to the recording of this investment. At the date of the original acquisition, $90,000 of the fair-value price was attributed to undervalued land while $50,000 was assigned to equipment having a 10-year life. The remaining $60,000 unallocated portion of the acquisition-date excess fair value over book value was viewed as goodwill.
Following are individual financial statements for the year ending December 31, 2013. On that date, Small owes Giant $10,000. Credits are indicated by parentheses.
a. How was the $135,000 Equity in Income of Small balance computed?
b. Without preparing a worksheet or consolidation entries, determine and explain the totals to be reported by this business combination for the year ending December 31,2013.
| Giant | Small |
Revenues | $(1,175,000) | $ (360,000) |
Cost of goods sold | 550,000 | 90,000 |
Depreciation expense | 172,000 | 130,000 |
Equity in income of Small | (135,000) | -0- |
Net income | $ (588,000) | $ (140,000) |
Retained earnings, 1/1/13 | $(1,417,000) | $ (620,000) |
Net income (above) | (588,000) | (140,000) |
Dividends paid | 310,000 | 110,000 |
Retained earnings, 12/31/13 | $(1,695,000) | $ (650,000) |
Current assets | $ 398,000 | $ 318,000 |
Investment in Small | 995,000 | -0- |
Land | 440,000 | 165,000 |
Buildings (net) | 304,000 | 419,000 |
Equipment (net) | 648,000 | 286,000 |
Goodwill | -0- | -0- |
Total assets | $ 2,785,000 | $ 1,188,000 |
Liabilities | $ (840,000) | $ (368,000) |
Common stock | (250,000) | (170,000) |
Retained earnings (above) | (1,695,000) | (650,000) |
Total liabilities and equity | $(2,785,000) | $(1,188,000) |
c. Verify the figures determined in part (b) by producing a consolidation worksheet for Giant and Small for the year ending December 31,2013.
d. If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2013, how would the parent's accounts reflect the impairment loss? How would the worksheet process change? What impact does an impairment loss have on consolidated financial statements?
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