Question

Advanced accounting question using the equity method

I have the answer already, so I would like to know the answer to this question in bold below:

     When figuring out the Pop's share of income, why is $30,000 being subtracted from 400,000 in income, since the question states that dividends paid are $200,000 ? That would mean 20,000 of dividends are paid to preferred stockholders given that the preferred stock is 10% cumulative, right ?

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

	Dec 31, 2016	Dec 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 Stockholder's equity	4,000	4,200

On January 2, 2017, Pop Corporation purchased 300,000 common shares of Son at $4 per share.

Determine 1) Pop's income from Son at $4 per share.

                  2) balance of the investment in Son account at Dec 31, 2017

   

Answer: Income from Son ($400,000 - 30,000 preferred dividends ) x 30% interest acquired = 111,000

Investment cost          1,200,000

Add:net income             111,000

Less: Dividends           (51,000) ---- ($ 200,000 dividends - 30,000 preferred stockholders' dividends) x 30%

Investment from Sun       1,260,000

Answer 1

Answer

• Dividend on Preferred Stock can be calculated using following two alternatives:

#1. By calculating Dividend per share of preferred stock, which is par value x Dividend rate.
As per question data, par value of preferred stock = $ 100, Hence, dividend per share = 100 x 10% = $ 10 per share
Total no. of preferred stock (on 31 Dec 2017) = $ 300 (000) / $ 100 par = 3,000 share
Hence, total preferred stock dividend = 3000 shares x $ 10 per share = $ 30,000
OR

#2. Direct calculation.
Preferred stock on 31 Dec 2017 = $ 300 (000)
Dividend rate = 10%
Dividend on Preferred stock = $ 300000 x 10% = $ 30,000

• Hence, dividend on preferred stock will be $ 30,000 [not $ 20,000].
  Both of the above alternatives have shown that preferred stock dividend would be $ 30,000