Smith, Inc., has the following stockholders’ equity accounts as of January 1, 20

Question

Smith, Inc., has the following stockholders’ equity accounts as of January 1, 2018:

Haried Company purchases all of Smith's common stock on January 1, 2018, for $14,440,000. The preferred stock remains in the hands of outside parties. Any excess acquisition-date fair value will be assigned to franchise contracts with a 40-year remaining life.

During 2018, Smith reports earning $640,000 in net income and declares $550,000 in cash dividends. Haried applies the equity method to this investment.

a. What is the noncontrolling interest's share of consolidated net income for this period?

b. What is the balance in the Investment in Smith account as of December 31, 2018?

c. What consolidation entries are needed for 2018?

Preferred stock—$150 par, nonvoting and nonparticipating, 6% cumulative dividend $ 2,190,000 Common stock—$10 par value 4,190,000 Retained earnings 10,190,000

Explanation / Answer

a. The preferred shares are entitled to the specified cumulative dividend. Thus, the noncontrolling interest's share of the subsidiary's income equals $131,400 noncontrolling interest's share 0.06*2,190,000=                 1,31,400 b. Purchase of Smith Common Stock $14,440,000 Subsidiary Income                                         1,31,400.00 Smith Net Income $640,000 Income for common Stock 640000 - 131400                 5,08,600 Dividends 550000 - 131400                 4,18,600 Book Value 2190000+4190000+10190000           1,65,70,000 Fair Value @ acquisition 14440000 + 2,190,000           1,66,30,000 Franchises 16630000-16570000                     60,000 Amortization Period                             40 Annual Amortization 60000/40                       1,500 Balance in the Smith Account on Dec 31, 2018 14440000+508600-418600-1500 $1,45,28,500 c. Journal Debit Credit Preferred Stock (Smith)                                            21,90,000 Common Stocl(Smith)                                            41,90,000 Retained Earnings(smith)                                         1,01,90,000 Franchises                                                  60,000 Investment In Smith           1,44,40,000 Non Controlling Interest in Smith               21,90,000 1 Equity Income of Subsidiary                                               1,29,900 Investment In Smith                 1,29,900 2 Investment in Smith                                               4,18,600 Dividends Paid                 4,18,600 3 Amortization Expense                                                     1,500 Franchises                       1,500

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