E 2-9 Calculate income and investment balance when investee capital structure includes preferred stockSon 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, 2016December 31, 201710% cumulative preferred stock, $100 par  $ 300  $ 300Common stock, $1 par 1,000 1,000Additional paid-in capital 2,200 2,200Retained earnings  500  700 Total stockholders’ equity$4,000$4,200On 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.RequiredDetermine (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.

Question
Asked Nov 19, 2019
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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

    Additional paid-in capital

     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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Expert Answer

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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