Refer to the information in P5.3.

Required
1. If other evidence suggests that Prism had only significant influence and not control over Sapphire, prepare the necessary equity accounting entries for the year ended 31 December 20x9.
2. Perform an analytical check on the balance of the investment in Sapphire account under the equity method.

Data from P5.3

Prism Co acquired 80% of the stock of Sapphire Co for $300,000 on 1 January 20x7. At acquisition date, Sapphire reported retained earnings of $150,000. The excess of Prism Co’s acquisition cost over its share of Sapphire’s book value was assigned to buildings and equipment that had a remaining life of ten years at acquisition date and deferred tax liability on the undervalued building and equipment.

The purchase consideration paid by Prism Co was proportional to Prism’s share of the fair value of Sapphire Co as an entity. Non-controlling interests are to be measured at its share of fair value of Sapphire Co as at acquisition date. The financial statements of the two companies for the year ended 31 December 20x9 are shown below.
Investment in Sapphire Co was carried at cost.

On 1 January 20x9, Prism Co held inventory purchased from Sapphire Co during 20x8 for $15,000, which had been manufactured by Sapphire at a cost of $10,000. During 20x9, Sapphire sold goods costing $40,000 to Prism Co for $60,000. Prism sold the inventory on hand at the beginning of the year but continued to hold 40% of its 20x9 purchases from Sapphire on 31 December 20x9. Tax rate was 20%.

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Statements of Financial Position As at 31 December 20x9 Sales... Cost of goods sold.. Dividend income.. Depreciation expense. Interest expense.... Tax and other expenses. Profit retained..... Retained earnings, 1 January. Dividends declared.. Retained earnings, 31 December. Cash and receivables. Inventory.. Land... Buildings and equipment, cost. Investment in Sapphire, cost. Debits..... Accumulated depreciation. Payables... Share capital..... Retained earnings. Credits... ... Prism $1,000,000 (640,000) 16,000 (100,000) (72,000) (44,000) $ 160,000 580,000 (40,000) $ 700,000 $ 620,000 Sapphire $ 480,000 (320,000) 0 (10,000) (14,000) (76,000) $ 60,000 300,000 (20,000) $ 340,000 $ 420,000 270,000 150,000 200,000 640,000 260,000 1,500,000 300,000 $3,320,000 $1,040,000 $1,000,000 $ 80,000 1,220,000 420,000 400,000 200,000 700,000 340,000 $3,320,000 $1,040,000