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# E 2-9 Calculate income and investment balance when investee capital structure includes preferred stock

• Son Company had net income of \$400,000 and paid dividends of \$200,000 during 2017. Son’s stockholders’ equity on December 31, 2016, and December 31, 2017, is summarized as follows (in thousands):

December 31, 2016

December 31, 2017

10% cumulative preferred stock, \$100 par

\$ 300

\$ 300

Common stock, \$1 par

1,000

1,000

2,200

2,200

Retained earnings

500

700

Total stockholders’ equity

\$4,000

\$4,200

On January 2, 2017, Pop Corporation purchased 300,000 common shares of Son at \$4 per share. Pop also paid \$50,000 in cash for direct costs of acquiring the investment.

# Required

Determine (1) Pop’s income from Son for 2017 and (2) the balance of the investment in the Son account at December 31, 2017. Assume the fair values of Son’s assets and liabilities equal book values.

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Step 1

Equity is the sum supported by the proprietors or investors of an organization for carrying the ceaseless activity of a business. The equities are reported on the balance sheet of a company. It is the value left in the assets after the sum total of liabilities have been paid off.

Step 2
1. To calculate P’s income for 2017:

To calculate PC’s ownership in SC:

PC’s ownership in SC= PC’s share ÷ Total no. of shares

= 300,000 ÷ 1,000,000

= 30%

Preferred dividend= 10% of \$300,000= \$30,000

Share of income to common stock= Income – preferred dividends

= \$400,000 - \$30,000

= \$370,000

P’s share of income= \$370,000 × 30%

&nb...

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