On January 1,20X9,Princeton Company acquired 80 percent of the common stock and 60 percent of the preferred stock of Stanford Company,for $400,000 and $60,000,respectively.At the time of acquisition,the fair value of the common shares of Stanford Company held by the noncontrolling interest was $100,000.Stanford Company's balance sheet contained the following balances:
Preferred Stock ($5 par value)$ 100,000
Common Stock ($10 par value)200,000
Retained Earnings 300,000
Total Stockholders' Equity $ 600,000
For the year ended December 31,20X9,Stanford Company reported net income of $100,000 and paid dividends of $40,000.The preferred stock is cumulative and pays an annual dividend of 10 percent.
-Based on the preceding information,what will be the equity method income reported by Princeton Company from its investment in Stanford Company during 20X9?

Question

On January 1,20X9,Princeton Company acquired 80 percent of the common stock and 60 percent of the preferred stock of Stanford Company,for $400,000 and $60,000,respectively.At the time of acquisition,the fair value of the common shares of Stanford Company held by the noncontrolling interest was $100,000.Stanford Company's balance sheet contained the following balances:
Preferred Stock ($5 par value)$ 100,000 
Common Stock ($10 par value)200,000 
Retained Earnings 300,000 
Total Stockholders' Equity $ 600,000
For the year ended December 31,20X9,Stanford Company reported net income of $100,000 and paid dividends of $40,000.The preferred stock is cumulative and pays an annual dividend of 10 percent.
-Based on the preceding information,what will be the equity method income reported by Princeton Company from its investment in Stanford Company during 20X9?

Quizplus · Accepted Answer

First, we need to calculate the noncontrolling interest in Stanford Company's equity.
Noncontrolling interest = Fair value of common shares held by noncontrolling interest = $100,000

Next, we need to calculate the share of net income earned by Stanford Company during 20X9 that belongs to Princeton Company.
Share of net income attributable to Princeton = (80% × $100,000) + (60% × $60,000) = $92,000

Since the preferred stock is cumulative, the preferred dividends for 20X9 would be $10,000 ($100,000 × 10%). As the dividend paid by Stanford was $40,000, the amount available for common stockholders would be $50,000.

Finally, we need to calculate the equity method income reported by Princeton Company during 20X9.
Equity method income = Share of net income - Dividends received
Equity method income = $92,000 - ($80,000 × 80%) = $72,000
Therefore, the best choice is C, $72,000.

On January 1,20X9,Princeton Company Acquired 80 Percent of the Common