In: Accounting
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
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.)
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 |