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, $75,500 of the fair-value price was attributed to undervalued land while $52,000 was assigned to undervalued equipment having a 10-year remaining life. The $72,500 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 $13,100. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

	Giant				Small
Revenues	$	(1,234,200	)		$	(491,500	)
Cost of goods sold		608,000				138,500
Depreciation expense		176,000				207,000
Equity in income of Small		(140,800	)			0
Net income	$	(591,000	)		$	(146,000	)
Retained earnings, 1/1/18	$	(1,730,000	)		$	(700,000	)
Net income (above)		(591,000	)			(146,000	)
Dividends declared		280,000				90,000
Retained earnings, 12/31/18	$	(2,041,000	)		$	(756,000	)
Current assets	$	549,000			$	278,000
Investment in Small		1,100,000				0
Land		441,000				239,000
Buildings (net)		384,000				460,000
Equipment (net)		699,000				339,000
Goodwill		0				0
Total assets	$	3,173,000			$	1,316,000
Liabilities	$	(882,000	)		$	(390,000	)
Common stock		(250,000	)			(170,000	)
Retained earnings(above)		(2,041,000	)			(756,000	)
Total liabilities and equities	$	(3,173,000	)		$	(1,316,000	)

a.How was the $140,800 Equity in Income of Small balance computed?

b.Determine the totals to be reported by this business combination for the year ending December 31, 2018.

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

d.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?

a.

How was the $140,800 Equity in Income of Small balance computed?

Equity accrual
Less: Amortization expense
Equity in Income of Small

b.

Determine the totals to be reported by this business combination for the year ending December 31, 2018.

	Totals
Revenues
Cost of goods sold
Depreciation expense
Income of Small
Net income
Retained earnings, 1/1/18
Dividends declared
Retained earnings, 12/31/18
Current assets
Investment in Small
Land
Building (net)
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Retained earnings, 12/31/18
Total liabilities and equity

c.

Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2018. (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. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.)

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GIANT COMPANY AND SMALL COMPANY
Consolidation Worksheet
For Year Ending December 31, 2018
			Consolidation Entries
Accounts	Giant	Small	Debit	Credit	Consolidated Totals
Revenues	$(1,234,200)	$(491,500)
Cost of goods sold	608,000	138,500
Depreciation expense	176,000	207,000
Equity income of Small	(140,800)	0
Net income	$(591,000)	$(146,000)
Retained earnings 1/1	$(1,730,000)	$(700,000)
Net income (above)	(591,000)	(146,000)
Dividends declared	280,000	90,000
Retained earnings 12/31	$(2,041,000)	$(756,000)
Current assets	$549,000	$278,000
Investment in Small	1,100,000	0
Land	441,000	239,000
Buildings (net)	384,000	460,000
Equipment (net)	699,000	339,000
Goodwill	0	0
Total assets	$3,173,000	$1,316,000
Liabilities	$(882,000)	$(390,000)
Common stock	(250,000)	(170,000)
Retained earnings (above)	(2,041,000)	(756,000)
Total liabilities and equity	$(3,173,000)	$(1,316,000)

d.

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? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

Record the loss on impairment of goodwill.

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

Answer 1

a.

Equity Accural	$ 146,000
Amortization Expense	$      5,200
Equity Income of Small	$ 140,800
Explanation:
Particulars	Amount	Life	Accural Excess Amortizations
Land	$    75,500	-	-
Equipment	$    52,000	10	$                                              5,200
Goodwill	$    72,500	Indefinite	$                                                     -
Total	$ 200,000		$                                              5,200

b.

Particulars	Totals	Solution
Revenues	$                       1,725,700	(1234200+491500)
Cost of Goods Sold	$                        (746,500)	(608000+138500)
Depreciation Expense	$                        (388,200)	(176000+207000+5200)
Income of Small	$                                      -	(The parent’s income balance is removed andreplaced with Small’s individual revenue andexpense accounts)
Net Income	$                          591,000	(1725700-746500-388200)
Retained Earnings , 1/1/18	$                       1,730,000	(the parent’s balance)
Dividend Declared	$                        (280,000)	(the parent number alone because the subsidiary dividend are intra-entity)
Retained Earnings , 31/12/18	$                       2,041,000	(591000+1730000-280000)
Current Assets	$                          813,900	(549000+278000-13100)
Investment in Small	$                                      -	(the parent's asset is removed so that Small's indivitual Asset and liabilities accounts can be brought into consideration
Land	$                          755,500	(441000+239000+75500)
Buildings	$                          844,000	(384000+460000)
Equipment	$                       1,064,000	(699000+339000+26000)
Goodwill	$                             72,500	(Represents the original price allocation)
Total Assets	$                       3,549,900
Liabilities	$                       1,258,900	(882000+390000-13100)
Common Stock	$                          250,000	(Parent balance only)
Retained Earnings , 31/12/18	$                       2,041,000	(see above)
Total Liabilities & Equity	$                       3,549,900

c.

Accounts	Giant	Small	Debit	Credit	Consolidated Total
Revenues	$(1,234,200)	$   (491,500)			$              (1,725,700)
Cost of Goods Sold	$    608,000	$    138,500			$                    746,500
Depreciation Expense	$    176,000	$    207,000	$      5,200		$                    388,200
Income of Small	$   (140,800)	$            -	$ 140,800		$                                -
Net Income	$   (591,000)	$   (146,000)	$ 146,000		$                  (591,000)
Retained Earnings , 1/1/18	$(1,730,000)	$   (700,000)	$ 700,000		$              (1,730,000)
Net Income	$   (591,000)	$   (146,000)	$ 146,000		$                  (591,000)
Dividend Declared	$    280,000	$      90,000		$       (90,000)	$                    280,000
Retained Earnings , 31/12/18	$(2,041,000)	$   (756,000)	$ 756,000		$              (2,041,000)
Current Assets	$    549,000	$    278,000		$       (13,100)	$                    813,900
Investment in Small	$ 1,100,000	$            -	$    90,000	$ (1,190,000)	$                                -
Land	$    441,000	$    239,000	$    75,500		$                    755,500
Buildings	$    384,000	$    460,000			$                    844,000
Equipment	$    699,000	$    339,000	$    31,200	$         (5,200)	$                1,064,000
Goodwill	$            -	$            -	$    72,500		$                      72,500
Total Assets	$ 3,173,000	$ 1,316,000	$ 269,200	$ (1,208,300)	$                3,549,900
Liabilities	$   (882,000)	$   (390,000)	$    13,100		$              (1,258,900)
Common Stock	$   (250,000)	$   (170,000)	$ 170,000		$                  (250,000)
Retained Earnings , 31/12/18	$(2,041,000)	$   (756,000)	$ 756,000		$              (2,041,000)
Total Liabilities & Equity	$(3,173,000)	$(1,316,000)	$ 939,100	$                   -	$              (3,549,900)

d.

Goodwill Impairment Loss	Dr	$ 72,500
To Investment in Small	Cr.		$ 72,500