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

Question

Quizplus · Accepted Answer

Pony Company's share of Stallion's net income is 25% of $270,000, which equals $67,500. However, dividends paid on preferred stock must be considered. The preferred dividends are 6% of the $800,000 par value (80,000 shares at $10 each), totaling $48,000. This reduces the available net income for common shareholders to $222,000 ($270,000 - $48,000). Pony's share of this adjusted net income is 25% of $222,000, which equals $55,500.

On January 1,20X4,Pony Company Acquired 25% of Stallion Company's Common