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, $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, 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 $14,900. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,239,100	)		$	(488,000	)
Cost of goods sold		642,000				135,000
Depreciation expense		213,500				131,000
Equity in income of Small		(213,400	)			0
Net income	$	(597,000	)		$	(222,000	)
Retained earnings, 1/1/18	$	(1,260,000	)		$	(710,000	)
Net income (above)		(597,000	)			(222,000	)
Dividends declared		310,000				90,000
Retained earnings, 12/31/18	$	(1,547,000	)		$	(842,000	)
Current assets	$	166,000			$	331,000
Investment in Small		1,169,000				0
Land		405,000				227,000
Buildings (net)		264,000				490,000
Equipment (net)		651,000				363,000
Goodwill		0				0
Total assets	$	2,655,000			$	1,411,000
Liabilities	$	(858,000	)		$	(399,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(1,547,000	)			(842,000	)
Total liabilities and equities	$	(2,655,000	)		$	(1,411,000	)

1-Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2018.

2-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?

Please show your calculations, thanks.

Answer 1

PART A

GIANT COMPANY AND SMALL COMPANY

Consolidation Worksheet

For Year Ending December 31, 2018

Accounts	GIANT	SMALL	Consolidation Entries		Consolidated
			debit	credit
Revenues	(1239100)	(488000)			(5105000)
Cost of goods sold	642000	135000			2281200
Depreciation expense	213500	131000	8600		695500
Equity income of Small	(213400)		213400		0
Net income	(597000)	(222000)			(597000)
Retained earnings 1/1/2018 balance	(1260000)	(710000)	710000		(1260000)
Net income (above)	(597000)	(222000)			(597000)
Dividends declared	310000	90000		90000	310000
Retained earnings 12/31/2018 balance	(1547000)	(842000)			(1547000)
Current assets	166000	331000		14900	482100
Investment in Small	1169000	0	90000	1259000	0
Land	405000	227000	46500		678500
Buildings (net)	264000	490000			754000
Equipment (net)	651000	363000	51600	8600	1071900
Goodwill	0	0	67500		330500
Total assets	2655000	1411000			3039100
Liabilities	(858000)	(399000)	14900		(1242100)
Common stock	(250000)	(170000)	170000		(250000)
Retained earnings 12/31/2018	(1547000)	(842000)			(1547000)
Total liabilities and equity	(2655000)	(1411000)			(3039100)

Revenues ‑ $5105000 (both balances are added together)

      Cost of Goods Sold - $2281200 (both balances are added)

      Depreciation Expense - $695500 (both balances are added along with excess equipment depreciation)

      Equity in Income of Small ‑ $0 (the parent's income balance is removed so that Small's Individual revenue and expense accounts can be brought into the consolidation)

      Net Income $597000 (consolidated expenses are subtracted from consolidated revenues)

      Retained Earnings, 1/1/06 – $1260000 (the parent number alone is used since the equity method has been applied)

      Dividends Paid ‑ $310,000 (the parent number alone is used since the subsidiary's dividends would have been intercompany, paid to Giant)

      Retained Earnings, 12/31/06 $1547000 (the consolidated balance at beginning of the year plus consolidated net income less consolidated dividends paid)

      Current Assets ‑ $482100 (both book balances are added together while the $14900 intercompany receivable is eliminated)

      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 ‑ $678500 (both book balances are added together along with the purchase price allocation)

      Buildings ‑ $754000 (both book balances are added together)

      Equipment ‑ $1071900 (both book balances are added together along with the unamortized portion of the purchase price allocation [after 5 years of excess depreciation])

Goodwill ‑ $67500 (represents the original price allocation)

Total Assets ‑ $3039100 (summation of all consolidated assets)

Liabilities ‑ $1242100 (both balances are added together while the $14900 intercompany payable is eliminated)

Common Stock ‑ $250,000 (parent balance only)

Retained Earnings, 12/31/06 – $1547000 (see above)

Total Liabilities and Equities ‑$3039100 (summation of all consolidated liabilities and equities)

PART B

If all goodwill from the Small investment was determined to be impaired, Giant would make the following journal entry on its books:

Account titles and explanation	debit	credit
Good will impairment loss	67500
Investment in Small		67500

                 

Amortization

		Remaining useful life	amortization
Land	46500	0	0
Equipment	86000	10	8600
Goodwill	67500	Indefinite	0
total	200000		8600