Question

Through the payment of $11,525,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 100,000 outstanding common shares ($40 par value) as well as all 17,500 shares of 6 percent, cumulative, $120 par value preferred stock. Of the total payment, $3.5 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2018, when Young reports retained earnings of $10.4 million and a total book value of $16.5 million. The acquisition-date fair value of the noncontrolling interest in Young's common stock was $5,350,000. On this same date, a building owned by Young (with a 6-year remaining life) is undervalued in the financial records by $240,000, while equipment with a 10-year remaining life is overvalued by $110,000. Any further excess acquisition-date fair value is assigned to a brand name with a 25-year remaining life. During 2018, Young reports net income of $940,000 while declaring $440,000 in cash dividends. Drexel uses the initial value method to account for both of these investments. Prepare appropriate consolidation entries for 2018

Prepare Entry S and A combined to eliminate the subsidiary stockholders' equity, record excess acquisition-date fair values, and to record the outside ownership of the subsidiary's preferred stock at acquisition-date fair value.

Prepare Entry I1 to offset the intra-entity preferred stock dividends recognized as income by the parent.

Prepare Entry I2 to eliminate the intra-entity dividends on common stock.

Prepare Entry E to record the current year amortization of specific accounts recognized within the acquisition price of preferred stock.

Answer 1

total book value	16500000
equity cap (40*100000)	4000000
retained earnings	10400000
preference share cap (remaining amount)	2100000			Balance sheet fair value adjustment
				Building	240000
				less equipment	-110000
entry s and a					130000
	Dr	Cr
Equity capital	4000000
Retained Earnings	10400000
preference share cap	2100000
Balance sheet fair value adjustment	130000
Brand name	245000
Investment in Youngs preference shares		3500000
Investment in Youngs equity		8025000
Non controlling Interest		5350000
entry I1
Preference Dividend income (Drexel)	126000			preference dividend = 6% * 210000=	126000
Preference Dividends paid (young)		126000
entry I2
Equity Dividend income (Drexel)	264000			60 % * 440000 =	264000
Equity Dividends paid (young)		264000
entry E
Amortization Expense (245000/25)	9800
Brand name		9800