Errant Inc The Net Incomes for Errant and Grub for the Year

question 66

Short Answer

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:
$\begin{array}{|l|r|r|r|}\hline & \text { Errant Inc. } & \text { Grub Inc. } & \text { Grub Inc. } \\\hline & \text { (carrying value) } & \text { (caryying value) } & \text { (fair value) } \\\hline \text { Cash } & \$ 120,000 & \$ 76,000 & \$ 76,000 \\\hline \text { Accounts Receivable } & \$ 80,000 & \$ 40,000 & \$ 40,000 \\\hline \text { Inventory } & \$ 60,000 & \$ 34,000 & \$ 50,000 \\\hline \text { Equipment (net) } & \$ 400,000 & \$ 80,000 & \$ 70,000 \\\hline \text { Trademark } & & \$ 70,000 & \$ 84,000 \\\hline \text { Total Assets } & \$ 660000 & \$ 300,000 & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 80,000 & \$ 80,000 \\\hline \text { Bonds Payable } & \$ 320,000 & \$ 60,000 & \$ 64,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 100,000 & \\\hline \text { Retained Earnings } & \$ 70,000 & \$ 60,000 \\\hline \text { Total Liabilities and Equity } & \$ 660,000 & \$ 300,000 \\\hline\end{array}$ The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.
Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.
Assume that Errant Inc. uses the equity method unless stated otherwise.
Which of the following journal entries would be required on December 31, 2019 to record the impairment of the goodwill?
A. No entry is required.
B.
$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Equity method income } & \$ 4, 000 & \\\hline \text { Investrnent in Grub } & & \$ 4,000\\\hline\end{array}$$
C.
$$\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Investrnent in Grub } &\$ 4,000& \\\hline \text { Equity method income } & & \$ 4,000 \\\hline\end{array}$$
D.

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Definitions:

Main Objective

The primary goal or purpose of an activity, project, or mission.

Building Goodwill

The process of creating positive feelings or attitudes towards oneself or an organization, often by being kind or helpful.

Your Convenience

A phrase often used to suggest a time or place that is easy and suitable for someone to meet or do something.

General Favorable

An overall positive or advantageous condition or situation.