Subsidiary with Preferred Stock Outstanding
Clayton Corporation purchased 75 percent of the common stock and 40 percent of the preferred stock of Topple Company on January 1, 20X6, for $270,000 and $80,000, respectively. At the time of purchase, the fair value of the common shares of Topple held by the noncontrolling interest was $90,000. Topple’s balance sheet contained the following balances:
Preferred Stock ($10 par value) | $200,000 |
Common Stock ($5 par value) | 150,000 |
Retained Earnings | 210,000 |
Total Stockholders’ Equity | $560,000 |
For the year ended December 31, 20X6, Topple reported net income of $70,000 and paid dividends of $50,000. The preferred stock is cumulative and pays an annual dividend of 8 percent.
Required
a. Prepare the journal entries recorded by Clayton for its investments in Topple during 20X6.
b. Present the eliminating entries needed to prepare the consolidated financial statements for Clayton Corporation as of December 31, 20X6.
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