Consolidation Working Paper Eliminations, Intercompany Merchandise Sales 

Prance Athleticwear Company owns all of the voting stock of Stallion Shoes. Acquisition cost was $7 million in excess of Stallion’s book value of $3 million, and the excess was attributed entirely to goodwill. As of the beginning of the current year, goodwill is impaired by $500,000. Goodwill is not impaired in the current year. Following is information on intercompany merchandise transactions between Prance and Stallion for the current year: 

• Intercompany profit in Prance’s beginning inventory, purchased from Stallion, is $300,000. 

• Intercompany profit in Stallion’s beginning inventory, purchased from Prance, is $400,000. 

• Intercompany profit in Prance’s ending inventory, purchased from Stallion, is $200,000. 

• Intercompany profit in Stallion’s ending inventory, purchased from Prance, is $250,000. 

• Total sales from Stallion to Prance, at the price charged to Prance, were $7 million. 

• Total sales from Prance to Stallion, at the price charged to Stallion, were $5 million. 

Prance uses the complete equity method to account for its investment in Stallion on its own books. The separate trial balances for Prance and Stallion at the end of the current year are below.

a. Prepare a schedule calculating equity in net income for the current year, appearing on Prance’s separate books ($1,250,000) and the end-of-year balance for Investment in Stallion, appearing on Prance’s separate books ($12,050,000). 

b. Prepare a working paper to consolidate the trial balances of Prance and Stallion. Label your eliminating entries (C), (I), (E), and (R).

• Enter answers in thousands ($400,000 equals $400 in thousands).
• Use negative signs with Cr (credit) answers in the Consolidated Balances Dr (Cr) column.
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Transcribed Image Text:

Prance Stallion (in thousands) Dr (Cr) Dr (Cr) Current assets $2,500 $1,500 Plant and equipment, net 350,000 250,000 Investment in Stallion 12,050 Liabilities (353,300) (245,500) Capital stock (2,000) (1,000) Retained earnings, beginning (6,000) (4,000) Sales revenue (275,000) (150,000) Equity in net income (1,250) Cost of sales 200,000 90,000 Operating expenses 73,000 59,000 Total $0 $0 Required

Answer rating: 100% (QA)

Total equity method refers to the available surplus to the equity holder of the company from the ass View the full answer