Question

Through the payment of $12,377,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 110,000 outstanding common shares ($50 par value) as well as all 10,000 shares of 7 percent, cumulative, $100 par value preferred stock. Of the total payment, $3.8 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2021, when Young reports retained earnings of $10.7 million and a total book value of $17.2 million. The acquisition-date fair value of the noncontrolling interest in Young's common stock was $5,718,000. On this same date, a building owned by Young (with a 5-year remaining life) is undervalued in the financial records by $350,000, while equipment with a 15-year remaining life is overvalued by $120,000. Any further excess acquisition-date fair value is assigned to a brand name with a 20-year remaining life.

During 2021, Young reports net income of $970,000 while declaring $470,000 in cash dividends. Drexel uses the initial value method to account for both of these investments.

Prepare appropriate consolidation entries for 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in millions.)

1. Prepare a combined entry for Consolidation Entries S and A.

2. Prepare Consolidation Entry I1 for the dividends declared on preferred stock.

3. Prepare Consolidation Entry I1 for the dividends declared on common stock.

4. Prepare Consolidation Entry E to record amortization.

Answer 1

1)

	Consolidation Entries
Date	Account Title and explanation	Debit ($)	Credit($)
31-12-2021	Preferred stock	1000000
	common stock	5500000
	retained earnings	10700000
	Building	350000
	Brand	665000
	To Equipment		120000
	To Investment in preferred stock		3800000
	To investment In common Stock		8577000
	To Non controlling Interest		5718000
	( To record the elimination of subsidiary stockholders equity
	record the excess fair value and outside ownership
	of subsidiary s preferred stock)

Working :

Working :
Calculation of fair value of Young as on 1 jan 2021
Particular	Amount ($)
Consideration transferred for 60% interest in young company	8577000
( 12377000 - 3800000 )
Consideration transferred for preference stock	3800000
Non Controlling interest in young company	5718000
Total fair value of young company	18095000
Calculation of Book value of reatined earning of young company as on 1st january 2021
Young company's common stock	5500000
( Total outstanding Common shares * par value )
(110000*50)
Young company's prefernce stock	1000000
( Total outstanding shares * par value )
( 10000 * 100 )
Young Company's retained earning	10700000
( 17200000 - (5500000 + 1000000)
Total book value of young company	17200000
Book Value of retained earning	10700000
Calculation of allocation of excess fair value over book value
Young compan's fair value	18095000
Young Book balue	17200000
Excess value ( 18095000 - 17200000 )	895000
Allocation of excess value
Adjustment to building	350000
Adjustment to equipment	-120000
Adjustment to brand value	665000
Total Adjustment	895000

2)

Date	Account Title and explanation	Debit ($)	Credit($)
31-12-2021	Dividend income ( preferred stock )	70000
	To Dividend paid preferred stock		70000
	(10000 * 100 * 7%)

3)

Date	Account Title and explanation	Debit ($)	Credit($)
31-12-2021	Dividend Income Common Stock	240000
	To dividend paid common stock		240000
	( 470000 - 70000 ) * 60%

4)

Date	Account Title and explanation	Debit ($)	Credit($)
31-12-2021	Amortization expenses	95250
	Equipment (120000/15)	8000
	To building (350000 / 5)		70000
	To brand Name ( 665000 / 20)		33250