Question

In: Accounting

Prime Company holds 60 percent of Suspect Company’s stock, acquired on January 1, 20X2, for $150,000....

Prime Company holds 60 percent of Suspect Company’s stock, acquired on January 1, 20X2, for $150,000. On the date of acquisition, Suspect reported retained earnings of $58,000 and $130,000 of common stock outstanding, and the fair value of the noncontrolling interest was $100,000. 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:

Prime Company Suspect Company
Item Debit Credit Debit Credit
Cash and Accounts Receivable $ 153,000 $ 56,000
Inventory 244,000 104,000
Land 104,000 75,000
Buildings and Equipment 450,000 162,000
Investment in Suspect Co. 182,700
Cost of Goods Sold 158,000 90,000
Depreciation and Amortization Expense 28,000 20,000
Other Expenses 22,000 11,000
Dividends Declared 56,000 39,000
Accumulated Depreciation $ 178,500 $ 47,000
Accounts Payable 50,000 23,000
Bonds Payable 190,000 44,000
Common Stock 280,000 130,000
Retained Earnings 401,000 148,000
Sales 270,000 165,000
Income from Suspect Co. 28,200
Total $ 1,397,700 $ 1,397,700 $ 557,000 $ 557,000


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 $15,000. No further impairment occurred in 20X7.
  2. On January 1, 20X5, Suspect sold land for $17,000 that had cost $6,500 to Prime.
  3. On January 1, 20X6, Prime sold to Suspect equipment that it had purchased for $67,200 on January 1, 20X1. The equipment has a total 12-year economic life and was sold to Suspect for $51,800. Both companies use straight-line depreciation.
  4. Intercompany receivables and payables total $6,000 on December 31, 20X7.


Required:
a. Prepare a reconciliation between the balance in Prime’s Investment in Suspect Co. account reported on December 31, 20X7, and Suspect’s book value. (Enter the proportion of stock held as a fraction (i.e., 0.75), not in percent.)
  

Solutions

Expert Solution

a.Reconciliation of underlying book value and balance in investment account:
Net book value reported by Suspect Company
    Common stock outstanding $ 130,000.00
    Retained earnings balance, January 1, 20X7 $ 148,000.00
    Net income for 20X7 $   44,000.00
    Dividends paid in 20X7 $ (39,000.00)
    Retained earnings balance, December 31, 20X7 $ 153,000.00
$ 283,000.00
Proportion of stock held by Prime Company x        .60
$ 169,800.00
Minus: Upstream Land Gain (17000 - 6500) x 60% $   (6,300.00)
Minus: Downstream Equipment Transfer Gain $ (63,200.00)
Add: Reversal of deferred gross profit 20X6 $     6,320.00
Add: Goodwill $   76,080.00
Balance in investment account $ 182,700.00

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