Question

Prime Corporation acquired 100 percent ownership of Steak Products Company on January 1, 20X1, for $250,000. On that date, Steak reported retained earnings of $70,000 and had $110,000 of common stock outstanding. Prime has used the equity-method in accounting for its investment in Steak.

The trial balances for the two companies on December 31, 20X5, appear below.

	Prime Corporation									Steak Products Company
Item	Debit				Credit					Debit				Credit
Cash & Receivables		$	53,000								$	75,000
Inventory			270,000									100,000
Land			90,000									90,000
Buildings & Equipment			510,000									160,000
Investment in Steak Products			267,000
Cost of Goods Sold			130,000									60,000
Depreciation Expense			35,000									25,000
Inventory Losses			25,000									13,000
Dividends Declared			40,000									20,000
Accumulated Depreciation						$	215,000								$	125,000
Accounts Payable							70,000									30,000
Notes Payable							220,000									38,000
Common Stock							310,000									110,000
Retained Earnings							360,000									100,000
Sales							210,000									140,000
Income from Steak Products							35,000
		$	1,420,000			$	1,420,000				$	543,000			$	543,000

Additional Information:

1. On the date of combination (five years ago), the fair value of Steak’s depreciable assets was $70,000 more than the book value. Accumulated depreciation at that date was $10,000. The differential assigned to depreciable assets should be written off over the following 10-year period.
2. There was $20,000 of intercorporate receivables and payables at the end of 20X5.

Prepare all journal entries that Prime recorded during 20X5 related to its investment in Steak.

1A.Record Prime Corp's share of Steak Products' 20X5 income.

2B. Record Prime Corp's share of Steak Products' 20X5 dividend.

3C. Record the amortization of the excess acquisition price.

Answer 1

Journal entries in the books of Prime to record its investment in Steak during 20X5

Event	Accounts Titles and Explanations	Ref	Debit	Credit
1	Income from Steak Products Dividend declared Investment in Steak Products (B/f) (To eliminate income from subsidiary Working Note - 5)		$ 36,000	$ 20,000 $ 16,000
2	Common stock – Steak Products Retained Earnings – January 1 Investment in Steak Products (To record payment of direct cost)		$ 110,000 $ 100,000	$ 210,000
3	Building and Equipment Investment in Steak Products (B/F) Accumulated Depreciation (To record the excess value of building and equipment and accumulated depreciation Working Note - 2)		$ 70,000	$ 42,000 $ 28,000
4	Depreciation expenses Accumulated Depreciation (To record amortization of excess value)		$ 7,000	$ 7,000
5	Accounts Payable Cash & Accounts receivable (To eliminate the intercorporate receivables and payables)		$ 20,000	$ 20,000

Journal entries in the books of Prime Corporation

Event	Accounts Titles and Explanations	Ref	Debit	Credit
1 A	Investment in Steak Products Income from Steak Products (To Prime Corporations share of Steak Products income (Working Note -4)		$ 42,000	$ 42,000
2 B	Cash Investment in Steak Products (To record dividend from Steak Products)		$ 20,000	$ 20,000
3 C	Income from Steak Products Investment in Steak Products (To record amortization of excess value acquired Working Note -2)		$ 7,000	$ 7,000

Working Note – 1

Calculation of Goodwill or Capital Reserve in the acquisition of Steak Products

particulars	Amount	Amount
Consideration paid by Prime Corporation		$ 250,000
Less: Book value of Streak corporation’s assets
a) Retained earnings	$ 70,000
b) Common stock outstanding	$ 110,000
c) Total		($ 180,000)
Excess of fair value over book value		$ 70,000
Allocation of excess value to specified account
Building and Equipment		$ 70,000

The Excess consideration paid by Prime Corporation is adjusted to Building and Equipment, hence no goodwill

Working Note - 2

Calculation of depreciation of excess value allocated to equipment

a) Building and Equipment	$ 70,000
b) life	10 years
c) Depreciation (Amortization)                        (a/b)	$ 7,000
d) Total accumulated depreciation for 4 years (c x 4)	$ 28,000

Working Note – 3

Excess value amortization table

	Value as on 01-01-2011	Value as on 12-31-2011	Value as on 12-31-2012	Value as on 12-31-2013	Value as on 12-31-2014
Building and Equipment less depreciation charged during the year	$ 70,000	$ 63,000	$ 56,000	$ 49,000	$ 42,000

Working Note -4

Calculation of net income of Steak for the year 2015

a) Sales	$ 140,000
b) Less: Cost of goods sold	($ 60,000)
Depreciation	($ 25,000)
Inventory losses	($ 13,000)
c) Net income	$ 42,000

Working Note – 5

Computation of Income from Steak Products

a) Net income of Steak Products	$ 42,000
b) Less: Excess paid Amortization	$ 7,000
c) Income after amortization	$ 36,000