Chapter 3, Problem 30P

a.

To determine

Explain how the $135,000 Equity in Income of Company S balance computed.

Explanation of Solution

Computation of $135,000 Equity in Income of Company S balance:

		Remaining life	Annual amortization
Allocation to equipment	$   50,000	10 years	$          5,000
Land	$   90,000	-	$                 -
Goodwill	$   60,000	Indefinite	-
Total	$ 200,000		$          5,000

Table: (1)

b.

To determine

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

Explanation of Solution

Totals to be reported by this business combination for the year ending December 31, 2018:

• Revenues: $1,535,000 which includes total of both companies.
• Cost of goods sold: $640,000 which includes total of both companies.
• Depreciation expense: $307,000 which is after adjusting the depreciation of equipment.
• Equity in income of Company S: $0 which is after removing parent’s income.
• Net income: $588,000 which is after deducting expenses from the revenue.
• Reatined earnings on 01/01: $1,417,000 whre the retained earnings of only parent are included.
• Dividends paid: $310,000 where the dividend of only parent has been taken into account.
• Retained earnings on 12/31: $1,695,000 which is after additing net income and reducing dividends.
• Current assets: $706,000 where the cash balance of both companies is added and intra-entity receivables is removed.
• Investment in Company S: $0 where the balance of the parent company is removed.
• Land: $695,000 where the fair value of $90,000 has also been allocated.
• Building: $723,000 which is after adding balances of both companies.
• Equipment: $959,000 which is after allocating fair value of $50,000 and depreciation of 5 years has been deducted.
• Goodwill: $60,000 which is after the allocation.
• Total assets: $3,143,000 which is sum of all the assets.
• Liabilities: $1,198,000 which includes total of both companies and intra-entity payable is removed.
• Common stock: $250,000 which includes balance of the parent only.
• Retained earnings on 12/31: $1,695,000 which the amount is after computation from opening retained earnings and net income.
• Total liabilities and equities: $3,143,000 which is sum total of all liabilities and equity.

c.

To determine

Verify the amounts determined in part (b) by producing a consolidation worksheet for Company G and Company S for the year ending December 31, 2018.

Explanation of Solution

Consolidation worksheet for Company G and Company S for the year ending December 31, 2018:

Income statement	Company G	Company S	Debit	Credit	Consolidated Balances
Revenues	$       (1,175,000)	$    (360,000)			$     (1,535,000)
Cost of goods sold	$           550,000	$        90,000			$         640,000
Depreciation expense	$           172,000	$      130,000	E 5,000		$         307,000
Equity earnings OF Company S	$          (135,000)		I 135,000		$                     -
Net income	$          (588,000)	$    (140,000)			$        (588,000)
Balance Sheet
Current assets	$           398,000	$      318,000		P 10,000	$         706,000
Investment in Company S	$           995,000	$                 -	D 110,000	S 790,000
				A 180,000	$                     -
				I 135,000
Land	$           440,000	$      165,000	A 90,000		$         695,000
Buildings	$           304,000	$      419,000			$         723,000
Equipment	$           648,000	$      286,000	A 30,000	E 5,000	$         959,000
Goodwill		$                 -	A 60,000		$           60,000
Total assets	$        2,785,000	$   1,188,000			$      3,143,000
Liabilities	$          (840,000)	$    (368,000)	P 10,000		$     (1,198,000)
Common stock	$          (250,000)	$    (170,000)	S 170,000		$        (250,000)
Retained earnings	$       (1,695,000)	$    (650,000)			$     (1,695,000)
Total liabilities and equity	$       (2,785,000)	$ (1,188,000)	$  1,230,000	$       1,230,000	$     (3,143,000)

Table: (2)

Working note:

Statement of retained earnings	Company G	Company S	Debit	Credit	Consolidated Balances
Retained earnings on 01/01	$       (1,417,000)	$    (620,000)	S 620,000		$     (1,417,000)
Net Income	$          (588,000)	$    (140,000)			$        (588,000)
Dividends declared	$           310,000	$      110,000		D 110,000	$         310,000
Retained earnings on 31/12	$       (1,695,000)	$    (650,000)			$     (1,695,000)

Table: (3)

d.

To determine

Explain the manner in which the parent’s accounts reflect the impairment loss. Explain the way in which the worksheet process change and the impact of an impairment loss on consolidated financial statements.

Explanation of Solution

The impairment loss will be reflected if the fair value of goodwill falls below its carrying amount. The impairment loss will be recorded in parent’s financial statements in this manner:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Goodwill impairment loss		$ 60,000
	Investment in Company S			$ 60,000
	(being impairment loss recorded)

Table: (4)

• The investment goodwill amount will be reported at $0 in the consolidated financial statements.
• The consolidated income will include the excess of acquisition price over the book value.
• The goodwill will be eliminated and the investment in Company S increases.