Giant purchased all of the common stock of small on January 1, 2009. Over the next few years, Giant applied the equity method to the recording of this investment. At the date of the original acquisition, $90,000 of the price was attributed to undervalued land, while $50,000 was assigned to equipment having a 10-year life. The remaining $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, 2013. On that date,. Small owes Giant $10,000. Credits are indicated by parentheses.
a- How was the $135,00 Equity in Income of Small balance computed?
b- Without preparing a worksheet or consolidation entries, determine and explain the totals to be reported by this business combination for the year enduing December 31, 2013.
Giant Small
Revenues...................................................$(1,175,000) $ (360,000)
Cost of Good of Sold..................................... 550,000 90,000
Depreciation Expense................................... 172,000 130,000
Equity in income of Small .............................. (135,000) -0-
Net Income $ (588,000) $140,000)
Retained Earnings 1/1/09............................. $(1,417,000) $ (620,000)
Net Income (above).................................... (588,000) (140,000)
Dividends paid.......................................... 310,000 110,000
Retained Earnings 12/31/09......................... $(1,695,000) $ (650,000)
Current Assets........................................ $ 398,000 $ 318,000
Investment Small..................................... 995,000 -0-
Land.................................................... 440,000 165,000
Buildings (net)........................................ 304,000 419,000
Equipment Net....................................... 648,000 286,000
Goodwill............................................... -0- -0-
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)
c- Verify the figures determined in part (b) by producing a consolidation worksheet for Giant and Small for the year ending December 31, 2013.
d- If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2013, how would the accounts of the parents reflect the impairment loss?. How would the worksheet process change? What impact does an impairment loss have on consolidated financial statements?.