Through the payment of $11,525,000 in cash, Drexel Company acquires voting contr

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.

Explanation / Answer

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

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