Moss Corp. owns 20% of Dobro Corp.'s preferred stock and 80% of its commonstock. Dobro's stock outstanding at December 31, Year 1, is as follows:10% cumulative preferred stock - $100,000, Common stock - 700,000. Dobro reported net income of $60,000 for the year ended December 31, Year 1. What amount should Moss record as equity in earnings of Dobro for the year endedDecember 31, Year 1?

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