Ownership of Subsidiary Preferred Stock
Presley Pools Inc. acquired 60 percent of the common stock of Jacobs Jacuzzi Company on December 31, 20X6, for $1,800,000. At that date, the fair value of the noncontrolling interest was $1,200,000. The full amount of the differential was assigned to goodwill. On December 31, 20X7, the management of Presley Pools reviewed the amount attributed to goodwill and concluded an impairment loss of $26,000 should be recognized in 20X7. On January 2, 20X7, Presley purchased 20 percent of the outstanding preferred shares of Jacobs for $42,000.
In its 20X6 annual report, Jacobs reported the following stockholders’ equity balances at the end of the year:
Preferred Stock (10 percent, $100 par) Premium on Preferred Stock Common Stock Additional Paid-In Capital—Common Retained Earnings | $ 200,000 5,000 500,000 800,000 1,650,000 |
Total Stockholders’ Equity | $3,155,000 |
The preferred stock is cumulative and has a liquidation value equal to its call price of $101 per share. Because of cash flow problems, Jacobs declared no dividends during 20X6, the first time it had missed a preferred dividend. With the improvement in operations during 20X7, Jacobs declared the current stated preferred dividend as well as preferred dividends in arrears; Jacobs also declared a common dividend for 20X7 of $10,000. Jacobs’s reported net income for 20X7 was $280,000.
Required
a. Compute the amount of the preferred stockholders’ claim on Jacobs Jacuzzi’s assets on December 31, 20X6.
b. Compute the December 31, 20X6, book value of the Jacobs common shares purchased by Presley.
c. Compute the amount of goodwill associated with Presley’s acquisition of Jacobs common stock.
d. Compute the amount of income that should be assigned to the noncontrolling interest in the 20X7 consolidated income statement.
e. Compute the amount of income from its subsidiary that Presley should have recorded during 20X7 using the basic equity method.
f. Compute the total amount that should be reported as noncontrolling interest in the December 31, 20X7, consolidated balance sheet.
g. Present all elimination entries that should appear in a consolidation worksheet to prepare a complete set of 20X7 consolidated financial statements for Presley Pools and its subsidiary.
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