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On January 1, 2014, Pamplin Corporation's stockholders' equity consisted of $1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. On January 1, 2014, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill. The stockholders' equity of Sage on this date consisted of $800,000 of $100 par value, 8% cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings. Sage's net income for 2014 was $100,000.

On January 1, 2014, no preferred dividends are in arrears. No dividends are declared or paid in 2014. In a separate transaction on January 1, 2014, Pamplin purchased 70% of Sage's preferred stock for $600,000.

-For the year ending December 31,2014,the amount of Pamplin's income from Sage (associated with the common stock investment in Sage)is

Question

Use the following information to answer the question(s) below.

On January 1, 2014, Pamplin Corporation's stockholders' equity consisted of $1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. On January 1, 2014, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill. The stockholders' equity of Sage on this date consisted of $800,000 of $100 par value, 8% cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings. Sage's net income for 2014 was $100,000.

On January 1, 2014, no preferred dividends are in arrears. No dividends are declared or paid in 2014. In a separate transaction on January 1, 2014, Pamplin purchased 70% of Sage's preferred stock for $600,000.

-For the year ending December 31,2014,the amount of Pamplin's income from Sage (associated with the common stock investment in Sage)is

Quizplus · Accepted Answer

Pamplin's income from Sage associated with the common stock investment is calculated as 90% of Sage's net income for 2014. Sage's net income for 2014 is $100,000, so Pamplin's share is 90% of $100,000, which equals $90,000 * 0.9 = $81,000. However, this calculation does not account for the preferred dividends that must be paid before common stockholders (including Pamplin) receive any income. The preferred stock is 8% cumulative on $800,000, which equals $64,000 ($800,000 * 0.08). Since Pamplin owns 70% of the preferred stock, it is entitled to 70% of the preferred dividends, but this portion does not reduce the income from its common stock investment. The entire $64,000 in preferred dividends reduces the net income available to common stockholders, including Pamplin. Thus, the corrected income from Sage to Pamplin is $100,000 (net income) - $64,000 (preferred dividends) = $36,000, and Pamplin's share of this is 90%, which equals $36,000 * 0.9 = $32,400.

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