Question

Prime Company holds 80 percent of Suspect Company’s stock, acquired on January 1, 20X2, for $160,000. On the acquisition date, the fair value of the noncontrolling interest was $40,000. Suspect reported retained earnings of $50,000 and had $100,000 of common stock outstanding. Prime uses the fully adjusted equity method in accounting for its investment in Suspect.

Trial balance data for the two companies on December 31, 20X6, are as follows:

	Prime Company									Suspect Company
Item	Debit				Credit					Debit				Credit
Cash and Accounts Receivable		$	113,000								$	35,000
Inventory			260,000									90,000
Land			80,000									80,000
Buildings and Equipment			500,000									150,000
Investment in Suspect Co.			191,600
Cost of Goods Sold			140,000									60,000
Depreciation and Amortization Expense			25,000									15,000
Other Expenses			15,000									5,000
Dividends Declared			30,000									5,000
Accumulated Depreciation						$	205,000								$	45,000
Accounts Payable							60,000									20,000
Bonds Payable							200,000									50,000
Common Stock							300,000									100,000
Retained Earnings							322,000									95,000
Sales							240,000									130,000
Gain on Sale of Equipment							20,000
Income from Suspect Co.							7,600
Total		$	1,354,600			$	1,354,600				$	440,000			$	440,000

Additional Information

1. At the date of combination, the book values and fair values of all separately identifiable assets and liabilities of Suspect were the same. At December 31, 20X6, the management of Prime reviewed the amount attributed to goodwill as a result of its purchase of Suspect stock and concluded an impairment loss of $18,000 should be recognized in 20X6 and shared proportionately between the controlling and noncontrolling shareholders.
2. On January 1, 20X5, Suspect sold land that had cost $8,000 to Prime for $18,000.
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 economic life of 15 years and was sold to Suspect for $70,000. Both companies use straight-line depreciation.
4. There was $7,000 of intercompany receivables and payables on December 31, 20X6.

Required:
a. Give all consolidation entries needed to prepare a consolidation worksheet for 20X6. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• Record the basic consolidation entry.
• Record the amortized excess value reclassification entry.
• Record the excess value (differential) reclassification entry.
• Record the entry to eliminate the intercompany receivable/payable.
• Record the entry to eliminate the gain on the sale of land.
• Record the entry to eliminate the gain on the equipment and to correct the asset's basis.
• Record the entry to adjust Accumulated Depreciation.

Answer 1

50,000 Goodwill (160000+40000-100000-50000)| Investments in the stock of Suspect Co. (50000*80%) Non-controlling interest (50000*20%) (Recognition of goodwill) 40,000 10,000 18,000 Goodwill impairment loss Non-controlling interest in net assets of Suspect Co. (18000*20%) Income from Suspect Co. 18000*80%) (Recognition of impairment loss on goodwill) 3,600 14,400 7,000 Accounts payable Accounts receivable (Elimination entry for intercompany receivables & payables) 7,000 No journal entry is required to eliminate gain on sale of land 20,000 Gain on sale of equipment [70000-(75000-(5000*5))) Equipment (Elimination of gain on sale of equipment) 20,000

400 Non-controlling interest in net assets of Suspect Co. (2000*20%) Income from Suspect Co. (2000*80%) Depreciation expense (20000/10) 1,600 2,000