Cost-to-equity conversion with preferred stock. On December 31, 20X4, Zigler Corporation purchases an 80% interest in the common stock of Kim Com- pany for $420,000. The stockholders' equity of Kim Company on December 31, 20X4, is as follows:
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8% Cumulative preferred stock (2,000 shares, $100 par)
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$200,000
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Common stock (30,000 shares, $10 stated value)
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300,000
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Retained earnings
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160,000
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Total stockholders' equity
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$660,000
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Any excess of cost over book value is attributable to goodwill. The common stock investment is accounted for under the cost method.
Zigler Corporation purchases 1,000 shares of the cumulative preferred stock of Kim Company on January 1, 20X5, for $90,000. Kim Company issues a total of 2,000 preferred shares on January 1, 20X1. Dividends on preferred stock are paid in 20X1 and 20X2, but not in subsequent years. Zigler Corporation accounts for its investment using the cost method.
During 20X5 and 20X6, Kim Company pays no dividends, and its retained earnings balance on December 31, 20X6, is $210,000. Kim Company income during 20X7 is $60,000.
1. Calculate the preferred and common stockholders' equity claim on Kim Company's retained earnings balance at January 1, 20X7.
2. Prepare the cost-to-simple-equity conversion and the elimination as of January 1, 20X7, that would be made on the December 31, 20X7, consolidated trial balance worksheet for the investment in preferred stock.
3. Prepare the cost-to-simple-equity conversion and the eliminations that would be made on the December 31, 20X7, consolidated trial balance worksheet for the investment in common stock. Provide a determination and distribution of excess schedule as support.