Question

Giant acquired all of Small’s common stock on January 1, 2011. Over the next few years, Giant applied the equity method to the recording of this investment. At the date of the original acquisition, $102,500 of the fair-value price was attributed to undervalued land while $53,000 was assigned to equipment having a 10-year life. The remaining $69,500 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, 2015. On that date, Small owes Giant $18,900. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

       

	Giant			Small
Revenues	$	(1,228,300	)	$	(450,500	)
Cost of goods sold		555,000			91,500
Depreciation expense		214,000			174,000
Equity in income of Small		(179,700	)		0
Net income	$	(639,000	)	$	(185,000	)
Retained earnings, 1/1/15	$	(1,890,000	)	$	(644,000	)
Net income (above)		(639,000	)		(185,000	)
Dividends declared		320,000			120,000
Retained earnings, 12/31/15	$	(2,209,000	)	$	(709,000	)
Current assets	$	721,500		$	177,000
Investment in Small		1,077,500			0
Land		505,000			238,000
Buildings (net)		329,000			500,000
Equipment (net)		678,000			342,000
Goodwill		0			0
Total assets	$	3,311,000		$	1,257,000
Liabilities	$	(852,000	)	$	(378,000	)
Common stock		(250,000	)		(170,000	)
Retained earnings(above)		(2,209,000	)		(709,000	)
Total liabilities and equities	$	(3,311,000	)	$	(1,257,000	)

      

a.	How was the $179,700 Equity in Income of Small balance computed?

      

b.	Determine the totals to be reported by this business combination for the year ending December 31, 2015.

     

        

c.	Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2015. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

Answer 1

(a)

Net Income of Small = $ 185,000
Less : Amortisation of Equipment ($53,000/10) = $ 5,300
Therefore, net income of small (after amortiation) = $ 179,700
Hence, Giant's share in income of small = $ 179,700*100% = $ 179,700

(b) Totals reported by the Business Combination -

1. Sales = $ (1,678,800)
2. Cost of goods sold = $ 646,500
3. Equity Income Nil
4. Depreciation = $ 393,300
5. Net Income = $ (824,000)
6. Current Assets = $ 879,600
7. Equity Investment = Nil
8. Land = $ 845,500
9. Building(net) = $ 829,000
10. Equipment = $ 1,046,500
11. Goodwill = $ 69,500
12. Liabilities = $ (1,211,100)
13. Common Stock = $ (250,000)
14. Retained Earnings = $ (2,209,000)

(c)

Consolidated Worksheet

Description	Giant($)	Small($)	Debit ($)	Credit ($)	Consolidated($)
Income Statement
Sales	(1,228,300)	(450,500)	0	0	(1,678,800)
Cost of goods sold	555,000	91,500	0	0	646,500
Equity Income	(179,700)	0	179,700	0	0
Depreciation Expense	214,000	174,000	5,300	0	393,300
Net Income	(639,000)	(185,000)			(639,000)
Statement of Retained Earnings
Retained Earnings	(1,890,000)	(644,000)	644,000	0	(1,890,000)
Net Income	(639,000)	(185,000)	185,000	0	(639,000)
Dividend	320,000	120,000	0	(120,000)	320,000
Ending Retained Earnings	(2,209,000)	(709,000)			(2,209,000)
Balance Sheet
Current Assets	721,500	177,000	0	(18,900)	879,600
Equity Investment	1,077,500	0	120,000	(1,197,500)	0
Land	505,000	238,000	102,500	0	845,500
Buildings (net)	329,000	500,000	0	0	829,000
Equipment (net)	678,000	500,000	53,000	(26,500)	1,046,500
Goodwill	0	0	69,500	0	69,500
	3,311,000	1,257,000			3,670,100
Liabilities	(852,000)	(378,000)	18,900	0	(1,211,100)
Common Stock	(250,000)	(170,000)	170,000	0	(250,000)
Retained Earnings	(2,209,000)	(709,000)	829,000	(120,000)	(2,209,000)
	(3,311,000)	(1,257,000)			(3,670,100)