Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 2019, when Seed Company had the following stockholders' equity:
$$\begin{array} { l r }
\text { Common stock, } \$ 10 \text { par } & \$ 300,000 \
\text { Cumulative preferred stock, } 10 \% , \$ 10 \text { par } & 100,000 \
\text { Paid-in excess of par, common } & 50,000 \
\text { Retained earnings } & 200,000
\end{array}$$ Any excess of cost over book value on the common stock purchase was attributed to goodwill.Page does not hold any of Seed's preferred stock.Seed had net income of $40,000 during 2019 and paid no dividends.

The preferred stock is two years in arrears on January 1, 2019.The controlling interest's share of Seed's 2019 net income is ____.
A)$24,000
B)$23,360
C)$25,600
D)$32,000

Question

Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 2019, when Seed Company had the following stockholders' equity: 
$$\begin{array} { l r } 
\text { Common stock, } \$ 10 \text { par } & \$ 300,000 \
\text { Cumulative preferred stock, } 10 \% , \$ 10 \text { par } & 100,000 \
\text { Paid-in excess of par, common } & 50,000 \
\text { Retained earnings } & 200,000
\end{array}$$ Any excess of cost over book value on the common stock purchase was attributed to goodwill.Page does not hold any of Seed's preferred stock.Seed had net income of $40,000 during 2019 and paid no dividends.

The preferred stock is two years in arrears on January 1, 2019.The controlling interest's share of Seed's 2019 net income is ____.
A)$24,000
B)$23,360
C)$25,600
D)$32,000

Quizplus · Accepted Answer

The controlling interest's share of Seed's net income is calculated by first determining the net income available to common shareholders. Seed's net income is $40,000, but preferred dividends must be accounted for. The annual preferred dividend is 10% of $100,000, which is $10,000. Since the preferred stock is two years in arrears, $20,000 is owed, but only the current year's $10,000 affects the 2019 net income. Thus, $40,000 - $10,000 = $30,000 is available to common shareholders. Page Company owns 80% of Seed's common stock, so the controlling interest's share is 80% of $30,000, which is $24,000.

Page Company Purchased an 80% Interest in the Common Stock