On January 1, 2009, 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. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: $\begin{array}{lr}
\text { Common stock, } \$ 10 \text { par value }(50,000 \text { shares outstanding) } & \$ 500,000 \
\text { Preferred stock, } 6 \% \text { cumulative, } \$ 100 \text { par value, } & \
3,000 \text { shares outstanding } & 300,000 \
\text { Additional paid in capital } & 200,000 \
\text { Retained earnings } & 500,000\\text { Total stockholders' equity }&\$1,500,000
\end{array}$
-Determine the amount and account to be recorded for Nichols' investment in Smith.
A) $1,324,000 for Investment in Smith.
B) $1,200,000 for Investment in Smith.
C) $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock.
D) $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock.
E) $1,448,000 for Investment in Smith's Common Stock.

Question

Quizplus · Accepted Answer

Nichols Company paid $1,200,000 for 80% of Smith's common stock and $124,000 for 40% of Smith's preferred stock. Therefore, the investment should be recorded separately as $1,200,000 for the common stock and $124,000 for the preferred stock.

On January 1, 2009, Nichols Company Acquired 80% of Smith