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, $64,000 of the fair-value price was attributed to undervalued land while $59,000 was assigned to undervalued equipment having a 10-year remaining life. The $77,000 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.

Following are individual financial statements for the year ending December 31, 2018. On that date, Small owes Giant $11,500. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,206,400	)		$	(524,000	)
Cost of goods sold		595,000				127,000
Depreciation expense		195,500				217,000
Equity in income of Small		(174,100	)			0
Net income	$	(590,000	)		$	(180,000	)
Retained earnings, 1/1/18	$	(1,660,000	)		$	(654,000	)
Net income (above)		(590,000	)			(180,000	)
Dividends declared		280,000				120,000
Retained earnings, 12/31/18	$	(1,970,000	)		$	(714,000	)
Current assets	$	413,500			$	221,000
Investment in Small		1,054,500				0
Land		522,000				211,000
Buildings (net)		395,000				509,000
Equipment (net)		740,000				308,000
Goodwill		0				0
Total assets	$	3,125,000			$	1,249,000
Liabilities	$	(905,000	)		$	(365,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(1,970,000	)			(714,000	)
Total liabilities and equities	$	(3,125,000	)		$	(1,249,000	)

1. How was the $174,100 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

Part A

Equity accrual	180000
Less: Amortization expense	5900
Equity in Income of Small	$174100

		Life	Annual Excess Amortizations
Land	64000	-	-
Equipment	59000	10	5900
Goodwill	77000	Indefinite	0
Total	$200000		$5900

Part 2

Revenues	$1730400	(1206400+524000)
Cost of goods sold	$722000	(595000+127000)
Depreciation expense	$418400	(195500+217000+5900)
Equity in income in small	$0	the parent's income balance is removed and replace with Small's individual revenue and expense accounts
Net income	$590000	Consolidated revenues – consolidated expenses
Retained earnings 1/1/18	$1660000	parent’s balance
Dividends paid	$280000	parent’s balance
Retained Earnings, 12/31/18	$1970000	parent’s balance + consolidated net income – consolidated dividends paid (1660000+590000-280000)
Current assets	623000	(413500+221000-11500)
Investment in small	0	the parent's asset is removed so that Small's individual asset and liability accounts can be brought into the consolidation
Land	797000	(522000+211000+64000)
Buildings	904000	(395000+509000)
equipment	1077500	(740000+308000+(59000-(5900*5))
Goodwill	77000	original price allocation
Total Assets	$3478500	summation of all consolidated assets
Liabilities	1258500	(905000+365000-11500)
Common Stock	250000	parent’s balance
Retained Earnings	1970000
Total Liabilities and Equity	$3478500	summation of all consolidated liabilities and equity

Part C

GIANT COMPANY AND SMALL COMPANY Consolidation Worksheet For Year Ending December 31, 2018
			Consolidation Entries
Accounts	Giant	Small	Debit	Credit	Consolidated Totals
Revenues	(1206400)	(524000)			(1730400)
Cost of goods sold	595000	127000			722000
Depreciation expense	195500	217000	5900		418400
Equity income of Small	(174100)	0	174100		0
Net income	(590000)	(180000)			(590000)
Retained earnings 1/1	(1660000)	(654000)	654000		(1660000)
Net income (above)	(590000)	(180000)			(590000)
Dividends declared	280000	120000		120000	280000
Retained earnings 12/31	(1970000)	(714000)			(1970000)
Current assets	413500	221000		11500	623000
Investment in Small	1054500	0	120000	1174500	0
Land	522000	211000	64000		797000
Buildings (net)	395000	509000			904000
Equipment (net)	740000	308000	59000	29500	1077500
Goodwill	0	0	77000		77000
Total assets	3125000	1249000			$3478500
Liabilities	(905000)	(365000)	11500		(1258500)
Common stock	(250000)	(170000)	170000		(250000)
Retained earnings (above)	(1970000)	(714000)			(1970000)
Total liabilities and equity	(3125000)	(1249000)	1335500	1335500	(3478500)

Part D

Giant Company General Journal
Account	Debit	Credit
Goodwill impairment loss	77000
Investment in Small		77000