Answer:
The correct answer of the following question is $42,000.
Explanation:
Given information -
Moss owns 20% of Dobro's preferred stock and 80 % of outstanding common stock.
Preferred stock (10%) $100,000
Common stock - $700,000
Dobro earnings for year 1, December 31 - $60,000
Here the equity method with consolidation will be used, which means the net income from subsidy would be recognized by Moss corp up to the interest.
therefore, we can calculate the earnings available for common stock and preferred stock.
Earnings available for preferred stock - $100,000 x 10% x 20%
= $10,000 x 20%
= $2000
Earnings available for common stock =
Total earnings from Dobro - Cumulative preference dividend
= $60,000 - $10,000 ( $100,000 x 10% )
= $50,000
Now on this $50,000 we will take out 80% of the interest that Moss owns
$50,000 x 80%
= $40,000
Therefore the total amount of earnings = $2000 + $40,000
= $42,000
