Giant acquired all of Small’s common stock on January 1, 2017, 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, $37,500 of the fair-value price was attributed to undervalued land while $98,000 was assigned to undervalued equipment having a 10-year remaining life. The $64,500 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Giant acquired all of Small’s common stock on January 1, 2017, 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, $37,500 of the fair-value price was attributed to undervalued land while $98,000 was assigned to undervalued equipment having a 10-year remaining life. The $64,500 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.

 

The following are individual financial statements for the year ending December 31, 2021. On that date, Small owes Giant $12,800. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

 

  Giant   Small
Revenues $ (1,298,800 )   $ (460,000 )
Cost of goods sold   610,000       115,000  
Depreciation expense   190,000       203,000  
Equity in income of Small   (132,200 )     0  
Net income $ (631,000 )   $ (142,000 )
Retained earnings, 1/1/21 $ (1,200,000 )   $ (688,000 )
Net income (above)   (631,000 )     (142,000 )
Dividends declared   290,000       120,000  
Retained earnings, 12/31/21 $ (1,541,000 )   $ (710,000 )
Current assets $ 181,000     $ 216,000  
Investment in Small   1,031,000       0  
Land   490,000       231,000  
Buildings (net)   396,000       435,000  
Equipment (net)   580,000       384,000  
Goodwill   0       0  
Total assets $ 2,678,000     $ 1,266,000  
Liabilities $ (887,000 )   $ (386,000 )
Common stock   (250,000 )     (170,000 )
Retained earnings(above)   (1,541,000 )     (710,000 )
Total liabilities and equities $ (2,678,000 )   $ (1,266,000 )
 

 

  1. How was the $132,200 Equity in Income of Small balance computed?
  2. Determine the totals to be reported by this business combination for the year ending December 31, 2021.
  3. Prepare a consolidation worksheet for Giant and Small for the year ending December 31, 2021.
  4. If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2021, what journal entry would Giant make to record such impairment?
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