Question 1

Aaron Company's books show current earnings of $435,000 and $50,000 in cash dividends. Zeese Company earns $144,000 in net income and declares $12,500 in dividends. Aaron has held a 70 percent interest in Zeese for several years, an investment with an acquisition-date excess fair over book value attributable solely to goodwill. Aaron uses the initial value method to account for these shares and includes dividend income in its internal earnings reports.

On January 1 of the current year, Zeese acquired in the open market $67,600 of Aarons 8 percent bonds. The bonds had originally been issued several years ago at 92, reflecting a 10 percent effective interest rate. On the date of purchase, the carrying amount of the bonds payable was $63,100. Zeese paid $58,600 based on a 12 percent effective interest rate over the remaining life of the bonds.

What is consolidated net income for this year?

a. $443,750.

b. $575,472.

c. $584,222

d. $574,028.

Question 2

Cairns owns 80 percent of the voting stock of Hamilton, Inc. The parents interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2017, Hamilton sold $1,300,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 40 percent of these bonds at 96 percent of face value on January 1, 2019. Both companies utilize the straight-line method of amortization.

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. December 31, 2019

2. December 31, 2020

3. December 31, 2021

Question 3

hrough the payment of $12,127,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 120,000 outstanding common shares ($40 par value) as well as all 17,000 shares of 8 percent, cumulative, $100 par value preferred stock. Of the total payment, $3.7 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2021, when Young reports retained earnings of $10.6 million and a total book value of $17.1 million. The acquisition-date fair value of the noncontrolling interest in Young's common stock was $5,618,000. On this same date, a building owned by Young (with a 5-year remaining life) is undervalued in the financial records by $320,000, while equipment with a 10-year remaining life is overvalued by $130,000. Any further excess acquisition-date fair value is assigned to a brand name with a 20-year remaining life.

During 2021, Young reports net income of $960,000 while declaring $460,000 in cash dividends. Drexel uses the initial value method to account for both of these investments.

Prepare appropriate consolidation entries for 2021.

a. Prepare a combined entry for Consolidation Entries S and A.

b. Prepare Consolidation Entry I1 for the dividends declared on preferred stock.

c. Prepare Consolidation Entry I1 for the dividends declared on common stock.

d. Prepare Consolidation Entry E to record amortization.