Prime Corporation acquired 80 percent of Steak Companys 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 Item Debit Credit Debit Credit Cash $ 130,300 $ 10,000 Accounts Receivable 80,000 70,000 Inventory 170,000 110,000 Buildings Equipment 600,000 400,000 Investment in Steak Company 293,000 Cost of Goods Sold 416,000 202,000 Depreciation Expense 30,000 20,000 Other Expenses 24,000 18,000 Dividends Declared 50,000 25,000 Accumulated Depreciation $ 310,000 $ 120,000 Accounts Payable 100,000 15,200 Bonds Payable 300,000 100,000 Bond Premium 4,800 Common Stock 200,000 100,000 Additional Paid in Capital 20,000 Retained Earnings 337,500 215,000 Sales 500,000 250,000 Other Income 20,400 30,000 Income from Steak Company 25,400 Total $ 1,793,300 $ 1,793,300 $ 855,000 $ 855,000 The full amount of the differential at acquisition was assigned to buildings and equipment with a remaining 10 year economic life 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 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 Steak owes Prime $10,000 on account on December 31, 20X7 Assume that both companies use straight line depreciation and that no property, plant, and equipment has been purchased since the acquisition Show how Prime Corp determined the $293,000 Investment in Steak account balance Assume that Prime defers 100 percent of downstream intra entity profits against its share of Steaks income

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 14, 2024

Prime Corporation acquired 80 percent of Steak Companys voting shares on January 1, 20X4, for $280,000 in cash and marketable securities. At that date, the

Prime Corporation acquired 80 percent of Steak Companys 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

Item	Debit		Credit		Debit	Credit
Cash	$	130,300				$	10,000
Accounts Receivable		80,000					70,000
Inventory		170,000					110,000
Buildings & Equipment		600,000					400,000
Investment in Steak Company		293,000
Cost of Goods Sold		416,000					202,000
Depreciation Expense		30,000					20,000
Other Expenses		24,000					18,000
Dividends Declared		50,000					25,000
Accumulated Depreciation				$	310,000			$	120,000
Accounts Payable					100,000				15,200
Bonds Payable					300,000				100,000
Bond Premium									4,800
Common Stock					200,000				100,000
Additional Paid-in Capital									20,000
Retained Earnings					337,500				215,000
Sales					500,000				250,000
Other Income					20,400				30,000
Income from Steak Company					25,400
Total	$	1,793,300		$	1,793,300	$	855,000	$	855,000

The full amount of the differential at acquisition was assigned to buildings and equipment with a remaining 10-year economic life.
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.
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.
Steak owes Prime $10,000 on account on December 31, 20X7.
Assume that both companies use straight-line depreciation and that no property, plant, and equipment has been purchased since the acquisition.

Show how Prime Corp. determined the $293,000 Investment in Steak account balance. Assume that Prime defers 100 percent of downstream intra-entity profits against its share of Steaks income.