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

question 36

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: If Smith's net income is $100,000 in the year following the acquisition,

• A)The portion allocated to the common stock (residual amount)is $92,800.
• B)$10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at noncontrolling interest in consolidated income.
• C)The noncontrolling interest in consolidated net income is $27,200.
• D)The preferred stock dividend will be ignored in noncontrolling interest in consolidated net income because Nichols owns the noncontrolling interest of preferred stock.
• E)The noncontrolling interest in consolidated net income is $30,800.

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Definitions:

Negotiable Instrument

A written document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.

Uniform Commercial Code

A comprehensive set of laws governing all commercial transactions in the United States, aiming to standardize and provide a legal framework for businesses and individuals engaging in commerce.

Previously Undisclosed Principal

A principal whose identity was not revealed by the agent at the time of entering into a contract with a third party.

Third Party

An entity that is not directly involved in a transaction or contract but may be affected by it or may have interests that are affected.