Question

On January 1, 20X4, Pony Company acquired 25% of Stallion Company's common stock at underlying book value of $200,000. Stallion has 80,000 shares of $10 par value, 6 percent cumulative preferred stock outstanding. No dividends are in arrears. Stallion reported net income of $270,000 for 20X4 and paid total dividends of $140,000. Pony uses the equity method to account for this investment.Based on the preceding information, what amount would Pony Company receive as dividends from Stallion for the year?

Answer 1

$23,000

Step-by-step explanation:

As for the provided information, we have

Shares acquired by Pony Company = 25% Equity

Preferred stock in Stallion Company = 80,000
`*` $10 = $800,000

Dividend to preference capital = $800,000
`*` 6% = $48,000

Dividend to equity by Stallion = $140,000 - $48,000

= $92,000

Since, Pony Company holds 25% share in equity, its dividends will also be 25% of total dividends for equity = $92,000
`*` 25% = $23,000