Question

Puny acquired all of Small's common stock on January 1,2013. Over the next few years, Puny applied the equity method to the recording of this investment. At the date of the original acquisition, $90,000 of the fair-value price was attributed to undevalued land while $50,000 was assigned to equipment having a 10-year remaining life. The $60,000 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 31,2017. On that date,Small owes Puny $10,000. Small declared and paid dividends in the same period. Credits are indicated by parentheses

                                                                                                  Puny               Small

Revenues                                                                    ($1,175,000)              ($360,000)

Cost of Goods sold                                                           $550,000                 $90,000

Depreciation expense                                                       $172,000                $130,000

Equity in income of Small                                               ($135,000)                       -

       Net income                                                              ($588,000)                 ($140,000)

Retained earnings, 1/1/17                                            ($1,417,000)                ($620,000)

Net income (above)                                                        ($588,000)                 ($140,000)

Dividends declared                                                          $310,000                   $110,000

      Retained earnings 12/31/17                                   ($1,695,000)                 ($650,000)

Current assets                                                                 $398,000                    $318,000

Investment in Small                                                         $995,000                          -

Land                                                                                 $440,000                    $165,000

Buildings (net)                                                                  $304,000                     $419,000

Equipment (net)                                                               $648,000                      $286,000

Goodwill                                                                                 -                                    -

      Total assets                                                              $2,785,000                 $1,188,000

Liabilities                                                                           ($840,000)                  ($368,000)

Common stock                                                                  ($250,000)                  ($170,000)

Retained earnings (above)                                             ($1,695,000)                  ($650,000)

       Total liabilities and equity                                        ($2,785,000)                ($1,188,000)

Required:

a) How was the $135,000 Equity in Income of Small balance computed?

b) Without preparing a worksheet of consolidation entries, determine and explain the totals to be reported by this business combination for the year ending Dec 31,2017.

c) Verify the figures determines in part B by producing a consolidation worksheet for Puny and Small for the year ending Dec 31,2017.

d) If Puny determined that the entire amount of goodwill from its investment in Small was impaired in 2017, how would the parent's accounts reflect the impairment loss? How would the worksheet process change? What impact does an impairment loss have on consolidated financial statements?

Answer 1

Solution 1 (a)

Particulars	Amount ( $)
Dividend Income from Equity	110,000
Income from Net Asset/Equity Increase	30,000
(-) Depreciation Impact on Equipment
(50,000/10)	(5,000)
Income from Equity	135,000

Here is Net Asset increase,
Particulars	Common Stock	Retained Earning	Equity
31st Dec'16	170,000	620,000	790,000
31st Dec'17	170,000	650,000	820,000
Increase in Equity			30,000

b) $ 3,143,000 would be total Assets or Laibilities as Puny acquired all the shares of Small and Investment are at Equity method.We have only eliminated $10,000 intra group Balances.

c)

Consolidation Worksheet
Particluars	Amount
Current Assets	706,000
Land	695,000
Building	723,000
Equipment	959,000
Goodwill	60,000
Total Assets	3,143,000
Liabilities	1,198,000
Common Stock	250,000
Retained Earnings	1,695,000
Total Liabilities	3,143,000

1.d) Goodwill will be removed from Asset side and Retained earning will be reduced by $60,000 of goodwill amount.Impairment loss shall be reflected at Consolidation statemnt of comprehensive of Income.Consolidated Worksheet assets and liabilities will be reduced by $60,000.