On January 1, 2021, Nichols Company Acquired 80% of Smith

question 87

Multiple Choice

On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: The consolidation entry at date of acquisition will include (referring to Smith) :

• A)Debit Common stock $500,000 and debit Preferred stock $120,000.
• B)Debit Common stock $400,000 and debit Additional paid-in capital $160,000.
• C)Debit Common stock $500,000 and debit Preferred stock $300,000.
• D)Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in capital $200,000.
• E)Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000.

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Definitions:

Self-Interest

Acting in a way that is most personally beneficial, often used in economics to describe behavior in markets.

Insurance Premiums

The amount paid periodically to an insurance company by policyholders for coverage and to keep the policy active.

Central Planning

An economic system where decisions about production, investment, and distribution are made by the government or a central authority.

Consumer Sovereignty

The concept that consumers' preferences determine the production of goods and services, guiding the allocation of resources in a market.