Prime Company holds 80 percent of the stock of Lane Company, acquired on January 1, 20X2, for \(\$ 160,000\). On the date of acquisition, Lane reported retained earnings of \(\$ 50,000\) and \(\$ 100,000\) of common stock outstanding. Prime uses the basic equity method in accounting for its investment in Lane Company.

Trial balance data for the two companies on December 31,20X7, are as follows:

1. At the date of combination, the book values and fair values of all separably identifiable assets of Lane Company were the same. At December 31, 20X6, the management of Prime Company reviewed the amount attributed to goodwill as a result of its purchase of Lane Company stock and recognized an impairment loss of \(\$ 25,000\). No further impairment occurred in \(20 \times 7\).
2. On January 1, 20X5, Lane Company sold land that had cost \(\$ 8,000\) to Prime Company for \(\$ 18,000\).
3. On January 1, 20X6, Prime Company sold to Lane Company equipment that it had purchased for \(\$ 75,000\) on January \(1,20 \mathrm{X} 1\). The equipment has a total economic life of 15 years and was sold to Lane Company for \(\$ 70,000\). Both companies use straight-line depreciation.
4. Intercorporate receivables and payables total \(\$ 4,000\) on December 31, 20X7.
\section*{Required}

a. Show how Prime's income from its subsidiary is computed for \(20 \times 7\).

b. Prepare a reconciliation between the balance in the investment in subsidiary account reported by Prime Company on December 31, 20X7, and the underlying book value of Lane Company.

c. Prepare all workpaper eliminating entries needed as of December 31, 20X7, and complete a three-part consolidation workpaper for \(20 \times 7\).

Transcribed Image Text:

Prime Company Item Debit Credit Cash and Accounts Receivable $ 151.000 Lane Company Debit $ 55,000 Credit Inventory 240,000 100,000 Land 100.000 80.000 Buildings and Equipment 500,000 150,000 Investment in Lane Company Stock 240,000 Cost of Goods Sold 160.000 80.000 Depreciation and Amortization 25.000 15.000 Other Expenses 20,000 10.000 Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Common Stock 60,000 35.000 $ 230.000 $ 60,000 60,000 25.000 200,000 50,000 300,000 100,000 Retained Earnings 420.000 140,000 Sales 250,000 150,000 Income from Subsidiary 36.000 Total $1,496,000 $1,496.000 $525,000 $525,000