Pinta Company has total stockholders' equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pinta owns 80% of Santa Maria Company purchased at book value. Santa Maria has $800,000 of 5% cumulative preferred stock outstanding. Pinta acquired 40% of the preferred stock of Santa Maria for $200,000. After this transaction the balances in Pinta's retained earnings and other contributed capital accounts are:

Question

Quizplus · Accepted Answer

Pinta's investment in Santa Maria is accounted for using the equity method. The investment is initially recorded at cost ($200,000) and adjusted each period for the share of Santa Maria's net income (loss) and dividends.The share of Santa Maria's net income is 40% x $800,000 = $320,000. This amount is added to Pinta's retained earnings.The share of Santa Maria's dividends is 40% x $40,000 = $16,000. This amount is added to Pinta's other contributed capital.Therefore, after the transaction, Pinta's retained earnings balance is $1,200,000 + $320,000 = $1,520,000, and its other contributed capital balance is $400,000 + $16,000 = $416,000.

Pinta Company Has Total Stockholders' Equity of $2,000,000 Consisting of $400,000