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, $64,500 of the fair-value price was attributed to undervalued land while $72,000 was assigned to undervalued equipment having a 10-year remaining life. The $63,500 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 $11,100. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,298,200	)		$	(446,500	)
Cost of goods sold		618,000				118,500
Depreciation expense		208,000				172,000
Equity in income of Small		(148,800	)			0
Net income	$	(621,000	)		$	(156,000	)
Retained earnings, 1/1/18	$	(1,280,000	)		$	(712,000	)
Net income (above)		(621,000	)			(156,000	)
Dividends declared		280,000				90,000
Retained earnings, 12/31/18	$	(1,621,000	)		$	(778,000	)
Current assets	$	329,000			$	344,000
Investment in Small		1,112,000				0
Land		447,000				253,000
Buildings (net)		398,000				439,000
Equipment (net)		503,000				353,000
Goodwill		0				0
Total assets	$	2,789,000			$	1,389,000
Liabilities	$	(918,000	)		$	(441,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(1,621,000	)			(778,000	)
Total liabilities and equities	$	(2,789,000	)		$	(1,389,000	)

1. How was the $148,800 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?

   GIANT COMPANY AND SMALL COMPANY Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Accounts Giant Small Debit Credit Consolidated Totals Revenues $(1,298,200) $(446,500) Cost of goods sold 618,000 118,500 Depreciation expense 208,000 172,000 Equity income of Small (148,800) 0 Net income $(621,000) $(156,000) $0 Retained earnings 1/1 $(1,280,000) $(712,000) Net income (above) (621,000) (156,000) 0 Dividends declared 280,000 90,000 Retained earnings 12/31 $(1,621,000) $(778,000) $0 Current assets $329,000 $344,000 Investment in Small 1,112,000 0 Land 447,000 253,000 Buildings (net) 398,000 439,000 Equipment (net) 503,000 353,000 Goodwill 0 0 Total assets $2,789,000 $1,389,000 $0 Liabilities $(918,000) $(441,000) Common stock (250,000) (170,000) Retained earnings (above) (1,621,000) (778,000) 0 Total liabilities and equity $(2,789,000) $(1,389,000) 0 0 $0

Answer 1

Part A

Equity accrual	156000
Less: Amortization expense	7200
Equity in Income of Small	$148800

		Life	Annual Excess Amortizations
Land	64500	-	-
Equipment	72000	10	7200
Goodwill	63500	Indefinite	0
Total	$200000		$7200

Part 2

Revenues	$1744700	(1298200+446500)
Cost of goods sold	$736500	(618000+118500)
Depreciation expense	$387200	(208000+172000+7200)
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	$621000	Consolidated revenues – consolidated expenses
Retained earnings 1/1/18	$1280000	parent’s balance
Dividends paid	$280000	parent’s balance
Retained Earnings, 12/31/18	$1621000	parent’s balance + consolidated net income – consolidated dividends paid (1280000+621000-280000)
Current assets	661900	(329000+344000-11100)
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	764500	(447000+253000+64500)
Buildings	837000	(398000+439000)
equipment	892000	(503000+353000+(72000-(7200*5))
Goodwill	63500	original price allocation
Total Assets	$3218900	summation of all consolidated assets
Liabilities	1347900	(918000+441000-11100)
Common Stock	25000	parent’s balance
Retained Earnings	1621000
Total Liabilities and Equity	$3218900	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	(1298200)	(446500)			(1744700)
Cost of goods sold	618000	118500			736500
Depreciation expense	208000	172000	7200		387200
Equity income of Small	(148800)	0	148800		0
Net income	(621000)	(156000)			(621000)
Retained earnings 1/1	(1280000)	(712000)	712000		(128000)
Net income (above)	(621000)	(156000)			(621000)
Dividends declared	280000	90000		90000	280000
Retained earnings 12/31	(1621000)	(778000)			(1621000)
Current assets	329000	344000		11100	661900
Investment in Small	1112000	0	90000	1202000	0
Land	447000	253000	64500		764500
Buildings (net)	398000	439000			837000
Equipment (net)	503000	353000	72000	36000	892000
Goodwill	0	0	63500		63500
Total assets	2789000	1389000			3218900
Liabilities	(918000)	(441000)	11100		(1347900)
Common stock	(250000)	(170000)	170000		(250000)
Retained earnings (above)	(1621000)	(778000)			(1621000)
Total liabilities and equity	(2789000)	(1389000)	1339100	1339100	(3218900)

Part D

Giant Company General Journal
Account	Debit	Credit
Goodwill impairment loss	63500
Investment in Small		63500