Question: Prime Company holds 80 percent of Suspect
Prime Company holds 80 percent of Suspect Company’s stock, acquired on January 1, 20X2, for $160,000. On the date of acquisition, Suspect reported retained earnings of $50,000 and $100,000 of common stock outstanding, and the fair value of the non controlling interest was $40,000. Prime uses the fully adjusted equity method in accounting for its investment in Suspect.
Trial balance data for the two companies on December 31, 20X7, are as follows:
Additional Information:
1. At the date of combination, the book values and fair values of Suspect’s separately identifiable assets and liabilities were equal. The full amount of the increased value of the entity was attributed to goodwill. At December 31, 20X6, the management of Prime reviewed the amount attributed to goodwill as a result of its purchase of Suspect stock and recognized an impairment loss of $18,000. No further impairment occurred in 20X7.
2. On January 1, 20X5, Suspect sold land for $18,000 that had cost $8,000 to Prime.
3. On January 1, 20X6, Prime sold to Suspect equipment that it had purchased for $75,000 on January 1, 20X1. The equipment has a total 15year economic life and was sold to Suspect for $70,000. Both companies use straight-line depreciation.
4. Intercompany receivables and payables total $4,000 on December 31, 20X7.
Required:
a. Prepare a reconciliation between the balance in Prime’s Investment in Suspect Company Stock account reported on December 31, 20X7, and Suspect’s book value.
b. Prepare all worksheet consolidation entries needed as of December 31, 20X7, and complete a three-part consolidation worksheet for 20X7.
Transcribed Image Text:
Prime Company Suspect Company Item Debit Credit Debit Credit $ 151,000 240,000 100,000 500,000 Cash & Accounts Receivable $ 55,000 Inventory Land 100,000 80,000 150,000 Buildings & Equipment Investment in Suspect Company Stock 201,600 Cost of Goods Sold Depreciation & Amortization Other Expenses 160,000 25,000 20,000 80,000 15,000 10,000 Dividends Declared 60,000 35,000 $ 230,000 60,000 200,000 300,000 Accumulated Depreciation Accounts Payable Bonds Payable $ 60,000 25,000 50,000 Common Stock Retained Earnings Sales 379,600 250,000 100,000 140,000 150,000 Income from Suspect 38,000 Total $1,457,600 $1,457,600 $525,000 $525,000
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