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: Credit $ Steak Company Debit Credit $ 10,000 70,000 110,000 400,000 Prime Corporation Debit 130,300 80,000 170,000 600,000 293,000 416,000 30,000 24,000 50,000 $ 310,000 100,000 300,000 202,000 Item Cash Accounts Receivable Inventory Buildings & Equipment Investment in Steak Company Cost of Goods Sold Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings Sales Other Income Income from Steak Company Total 20,000 18,000 25,000 200,000 $120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 337,500 500,000 20,400 25,400 $1,793,300 $1,793,300 $855,000 $855,000 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. Required: a. Prepare the 20X7 journal entries recorded on Prime's books related to its investment in Steak if Prime uses the equity method. (If no entrv is required for a transaction/event. select "No journal entry required" in the first account field.) Journal entry worksheet Record the reversal of the deferred gross profit from downstream sales in 20x6. Note: Enter debits before credits. Event General Journal Debit Credit 4 Record entry Clear entry View general journal Journal entry worksheet Record the reversal of the deferred gross profit from downstream sales in 20x6. Note: Enter debits before credits. Event General Journal Debit Credit 4 Record entry Clear entry View general journal Journal entry worksheet
