Pail Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of Shovel Corporation at underlying book value on January 1,20X9.At that date,the fair value of the noncontrolling interest in Shovel's common stock was equal to 20 percent of the book value of its common stock.Shovel's balance sheet at the time of acquisition contained the following balances:
The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1,20X9.All of the $5 par value preferred shares are callable at $6 per share.During 20X9,Shovel reported net income of $100,000 and paid no dividends.
-Based on the preceding information,what is Shovel's contribution to consolidated net income for 20X9?

Question

Pail Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of Shovel Corporation at underlying book value on January 1,20X9.At that date,the fair value of the noncontrolling interest in Shovel's common stock was equal to 20 percent of the book value of its common stock.Shovel's balance sheet at the time of acquisition contained the following balances:
  The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1,20X9.All of the $5 par value preferred shares are callable at $6 per share.During 20X9,Shovel reported net income of $100,000 and paid no dividends.
-Based on the preceding information,what is Shovel's contribution to consolidated net income for 20X9?

Quizplus · Accepted Answer

The consolidated net income for 20X9 includes the net income of both Pail and Shovel, adjusted for any intercompany transactions. As Pail acquired 80% of the common shares and 70% of the preferred shares of Shovel, it has control over Shovel and must include the entire net income of Shovel in the consolidated net income, regardless of the percentage of preferred shares held.

Since Shovel reported net income of $100,000, its contribution to consolidated net income for 20X9 is also $100,000. Therefore, the correct answer is B.

Pail Corporation Acquired 80 Percent of the Common Shares and 70