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-How was the $213,400 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?

Please show your calculations, thanks.

Answer 1

a) As per Equity method :

Equity = income as earnings - amortization

Amortization = Equipment value / years = 86000/10 = $8600

Equity = net income of Small - amortization

= 222000 - 8600 = $213,400

2. Totals to be reported by this business combination:

Revenues= 1239100+488000= $1727100

Cost of goods sold= 642000+135000 = $777,000

Depreciation expense= 213500+131000+8600 (additional annual amortization) = $353,100

Equity in income of Small = 0 (In this accounting method, the parent company's income balance is removed and replaced with the income balance of the subsudiary)

Net income = consolidated values of revenues - cost of goods sold - depreciation

= 1727100 - 777000 - 353100 = $597,000

Retained earnings 1/1/18= $1260,000 (parent company's balance)

Dividends declared = $ 310,000 (parent company's balance because subsidiary's dividends are intra-entity)

Retained earnings 12/31/18 = opening balance of retained earnings + consolidated net income - dividends declared

= $1260,000 + $597,000 - $310,000 = $1547,000

Current assets = current assets of both companies - inter-company receivable

= 166000 + 331000 - 14900 = $482,100

Investment in Small = $0 (the parent asset is removed)

Land = 405000+227000+46500=$ 678,500 (consolidated value of land including fair value of land amortised)

=405000+227000+46500 = $678,500

Buildings = 264000+490000= $754,000

Equipment = consolidated value + undervalue of equipment - amortization paid for 5 years

= 651000+363000+(86000-43000) = $1057,000

Goodwill= $67,500 (amount reported at the time of acquisition)

Total assets = 2655000+1411000 = $4066,000

Total liabilities = consolidated liabilties - amount owed by Small to Big

= 858000+399000-14900=$1242,100

Common stock= $250,000 (only parent companys value)

Retained earnings (already calculated above)

Total liabilties and equity= consolidated liabilities+common stock+ retained earnings

= 1242,100 + 250,000 + 1547,000 = $ 3039,000