Pan Corporation has total stockholders’ equity of $5,000,000 consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation’s common stock purchased at book value, which equals fair value. Sailor has $900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred stock of Sailor for $500,000. After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are
A. $2,960,000 and $1,000,000.
B. $3,000,000 and $960,000.
C. $3,000,000 and $1,040,000.
D. $3,040,000 and $1,000,000.
Answer:C
Pan Corporation has total stockholders’ equity of $5,000,000 consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation’s common stock purchased at book value, which equals fair value. Sailor has $900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred stock of Sailor for $500,000. After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are
A. $2,960,000 and $1,000,000. B. $3,000,000 and $960,000. C. $3,000,000 and $1,040,000. D. $3,040,000 and $1,000,000.
Explanation: C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid ($500,000) for the preferred stock, then the difference is added to the parent’s additional paid-in capital.