Giant acquired all of Smalls common stock on January 1, 2017, in exchange for cash of $770,000.

Question:

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, $90,000 of the fair-value price was attributed to undervalued land while $50,000 was assigned to undervalued 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. 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 $10,000. Small declared and paid dividends in the same period. Credits are indicated by parentheses.

a. How was the $135,000 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 ending December 31, 2021.

c. Verify the amounts determined in part (b) by producing a consolidation worksheet for Giant and Small for the year ending December 31, 2021.

d. If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2021, 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?

Glant Small Revenues. $(1,175,000) $ ( 360,000) Cost of goods sold. Depreciation expense. Equity in income of Small. Net income.. 550,000 90,000 172,000 130,000 -0- (135,000) $ (588,000) $ ( 140,000) $(1,417,000) (588,000) 310,000 $ (620,000) (140,000) 110,000 $ (650,000) Retained earnings, 1/1/21. Net income (above) Dividends declared. Retained earnings,