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Consolidations-Subsequent to the date of Acquisition

Giant purchased all of the common stock of small on January 1, 2005 Over the next few years, Giant apply the equity method to the recording of this investment. At the date of the original purchase. $90,000of the price was attribute to undervalued land, while $50,000 unallocated portion of the purchase price was viewed as goodwill.
Following are individual financial statements for the year ending December 31, 2009. 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, 2009.

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, 2009.
d- If Giant determined that the entire amount of goodwill from its investment in Small was impaired in 2009, 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?.

Palm Co. acquired 100 percent of the voting stock of Storm Company on January 1, 2003, by issuing 10,000 shares of its $10 a par value common stock (having fair value of $13. per share). Palm also paid $10,000 in acquisition fees to lawyers and investments analysis. As of that date, Storm had stockholders' equity totaling $105,000. Land shown on Storm's accounting records was undervalued by $10,000 Equipment (with a five year life) was undervalued by $5,000. A secret formula developed by Storm was appraised at $20,000 with an estimated life of 20 years.
Following are the separate financial statements for the two companies for the year ending December 31, 2007. Credit balances are indicated by parentheses.

Palm Co. Storm Co.

Revenues......................................... $ (485,000) $ (190,000)
Cost of Good Sold.............................. 160,000 70,000
Depreciation Expense........................ 130,000 52,000
Equity in Subsidiary earnings.............. (65,000) -0-

Net Income..................................... $ (261,000) $ (68,000)

Retained Earnings 1//1/07.................. $ (659,000) $ (98,000)
Net Income (above).......................... (261,000) $ (68,000)
Dividends paid................................ 175,000 40,000

Retained Earnings 12/31/07............... $ (744,500) $ (126,000)
Current Assets............................... $ 268,000 $ 75,000
Investments in Storm Co................... $ 216,000 $ -0-
Land............................................ $ 427,000 $ 58,000
Buildings and Equipment................. $ 713,000 $ 161,000
Total Assets................................. $ 1,624,500 $ 294,000
Current Liabilities............................... $ (110,000 ) $ (19,000)
Long term liabilities............................ (80,000) (84,000)
Common Stock................................... (600,000) (60,000)
Additional Paid in Capital.................... (90,000) (5,000)
Retained Earnings 12/31/07.................. (744,500) (126,000)
Total Liabilities and Equity................... $ (1,624,500) $ (294,000)

a- How was the $66,000 balance in the Subsidiary Earnings account derived?
b- Prepare a worksheet to consolidate the financial information for these two companies.
c- How would Storm's individual financial records fifer if the push-down method of accounting had been applied?.

Answer this question like a discussion threaths. (This is Consolidation and Goodwill issues):
Discussion #1
Why did the FASB decide that goodwill amortization should not be allowed and that goodwill should instead be periodically tested for impairment?

Discussion #2
How do firms determine when and if goodwill is impaired?

How are goodwill impairment losses recognized in consolidated financial statements?

How are they handled in the parent's records?

Solution Summary

Giant purchased all of the common stock of small on January 1, 2005 Over the next few years, Giant apply the equity method to the recording of this investment. At the date of the original purchase. $90,000of the price was attribute to undervalued land, while $50,000 unallocated portion of the purchase price was viewed as goodwill.

$2.19