Reference no: EM13522244

Giant acquired all of Small's common stock 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 fair-value 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 $135,000 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, 2013.

Giant	Small
Revenues	($1,175,000)	($360,000)
Cost of goods 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, 1/1/13	($1,417,000)	($620,000)
Net income (above)	588,000	140,000
Dividends paid	310,000	110,000
Retained earnings, 12/31/13	($1,695,000)	($650,000)
Current assets	$398,000	$318,000
Investment in 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 parent's accounts reflect the impairment loss? How would the worksheet process change? What impact does an impairment loss have on consolidated financial statements?