Smith, Inc., has the following stockholders\' equity accounts as of January 1, 2

Question

Smith, Inc., has the following stockholders' equity accounts as of January 1, 2018: Preferred stock-$100 par, nonvoting and nonparticipating, 6% cumulative dividend Common stock-$20 par value Retained earnings $ 2,250,000 4,250,000 10,250,000 Haried Company purchases all of Smith's common stock on January 1, 2018, for $14,550,000. 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 $700,000 in net income and declares $610,000 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?

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 $135000 or 6 percent of the preferred stock's par value b Acquisition-date fair value allocation and amortization Consideration transferred 14550000 Noncontrolling interest fair value (preferred shares) 2250000 Acquisition-date fair value of Smith 16800000 Book value 16750000 Franchises 50000 Period of amortization 40 Annual amortization 1250 Investment in Smith account, December 31, 2018 Consideration transferred, January 1,2018 14550000 Equity accrual (income remaining for common stock after preferred stock dividend) (700000-135000) 565000 Dividends collected (610000 less 135000)paid to preferred shareholders -475000 Amortization for 2018 (above) -1250 Investment in Smith account, December 31, 2018 14638750 c Entry S and A combined Preferred stock smith 2250000 Common stock smith 4250000 Retained Earnings, 1/1/18 (Smith) 10250000 Franchises 50000 Investment in Smith 14550000 Noncontrolling Interest in Smith, Inc 2250000 Equity income of subsidiary 563750 Investment in Smith 563750 Investment in Smith 475000 Dividends Paid 475000 Amortization Expense 1250 Franchises 1250

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