On January 1, 20X4, Timber Company acquired 25% of Johnson Company's common stock at underlying book value of $200,000. Johnson has 80,000 shares of $10 par value, 6 percent cumulative preferred stock outstanding. No dividends are in arrears. Johnson reported net income of $270,000 for 20X4 and paid total dividends of $140,000. Timber uses the equity method to account for this investment.
-Based on the preceding information,what amount of investment income will Timber Company report from its investment in Johnson for the year?
A) $140,000
B) $67,500
C) $55,500
D) $35,000

Question

Quizplus · Accepted Answer

Timber Company owns 25% of Johnson's common stock, so it recognizes 25% of Johnson's net income as investment income. Johnson's net income is $270,000, so Timber's share is 25% of $270,000, which equals $67,500. However, preferred dividends must be deducted before calculating the share of net income attributable to common shareholders. Johnson's preferred dividends are 80,000 shares * $10 par value * 6% = $48,000. Therefore, the net income available to common shareholders is $270,000 - $48,000 = $222,000. Timber's share is 25% of $222,000, which equals $55,500.

On January 1, 20X4, Timber Company Acquired 25% of Johnson