On December 31, 20X7, Prime Corporation recorded the following entry on its books to adjust from the fully adjusted equity method to the modified equity method for its investment in Steak Company stock:

Required

a. Adjust the data reported by Prime in the trial balance contained in P6– 34 for the effects of the preceding adjusting entry.

b. Prepare the journal entries that would have been recorded on Prime’s books during 20X7 under the modified equity method. 

c. Prepare all consolidation entries needed to complete a consolidation worksheet at December 31, 20X7, assuming Prime has used the modified equity method.

d. Complete a three-part consolidation worksheet as of December 31, 20X7.

Data from Exercises 34

Prime Corporation acquired 80 percent of Steak Company’s voting shares on January 1, 20X4, for $280,000 in cash and marketable securities. At that date, the noncontrolling interest had a fair value of $70,000 and Steak reported net assets of $300,000. Assume Prime uses the fully adjusted equity method. Trial balances for the two companies on December 31, 20X7, are as follows:

Additional Information

1. The full amount of the differential at acquisition was assigned to buildings and equipment with a remaining 10-year economic life.

2. Prime and Steak regularly purchase inventory from each other. During 20X6, Steak Company sold inventory costing $40,000 to Prime Corporation for $60,000, and Prime resold 60 percent of the inventory in 20X6 and 40 percent in 20X7. Also in 20X6, Prime sold inventory costing $20,000 to Steak for $26,000. Steak resold two-thirds of the inventory in 20X6 and one-third in 20X7.

3. During 20X7, Steak sold inventory costing $30,000 to Prime for $45,000, and Prime sold items purchased for $9,000 to Steak for $12,000. Before the end of the year, Prime resold one-third of the inventory it purchased from Steak in 20X7. Steak continues to hold all the units purchased from Prime during 20X7.

4. Steak owes Prime $10,000 on account on December 31, 20X7.

5. Assume that both companies use straight-line depreciation and that no property, plant, and equipment has been purchased since the acquisition.

Transcribed Image Text:

Investment in Steak Company Stock 11,000 Retained Earnings Income from Steak Company 8,400 2,600