Question

- Complete the specific consolidation entries related to the Additional Information items #2 and #3 ONLY. One is a land transfer, and the other is a depreciable asset transfer. (not the whole consolidation)

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 S50,000 and had $100,000 of common stock outstanding. Prime uses the fully adjusted equity method in accounting for its investment in Suspect Advanced StudyGuide com Trial balance data for the two companies on December 31, 20X6, are as follows Prime Company Suspect Company Debit S 113,000 260.000 S0.000 500,000 191,600 140,000 25,000 15,000 30,000 Debit S 35.000 90.000 0.000 150,000 Item Cash & Accounts Receivable Inventory Land Buildings &Equipment Investment in Suspect Company Stock Cost of Goods Sold Depreciation & Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Gain on Sale of Equipment Income from Suspect Total Credit Credit 60.000 15,000 5,000 5,000 S 205,000 60.000 200.000 300.000 322.000 240.000 20,000 7.600 $1,354.600 S 45,000 20.000 50.000 100.000 95.000 130.000 S1,354.600 $440.000 $440,000 Additional Information Page 366 I. 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. 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

Answer 1

Entries pertaining to Additional Info #2.

In the books of Suspect Company

Bank A/c Dr. $18000

To Land A/c $ 8000

To Inter-company Gain A/c $10000

In the books of Prime Company

Land A/c Dr. $8000

Inter-Company Gain A/c Dr. $10000

To Bank A/c $ 18000

The debit & credit in the ledger of inter-company gain a/c helps the company to effectively ignore the effect of gain in the

transaction during consolidation.

_________________________________________________________________________

Entries pertaining to Additional Info #2.

Date of Purchase Jan 1,20x1

Value : $75000

Accumulated Depreciation as on Jan1, 20x5 = $20000

Sale Value : $70000

In the books of Prime Company

Bank A/c Dr. $70000

Accumulated Depreciation A/c Dr. $20000

To Gain on Sale of Machinery A/c $15000

To Machinery A/c $75000

In the books of Suspect Company

Machinery A/c Dr. $70000

To Bank A/c $ 70000

Machinery A/c Dr.$5000

Gain on Sale of Machinery A/c Dr.$15000

To Accumulated Depreciation A/c $20000