E 10-4

[Preferred stock] Investment cost and net income—subsidiary preferred stock Pam Corporation owns 80 percent of Sun Corporation’s common stock, having acquired the interest at a fair value equal to book value on December 31, 2016. During 2017, Pam’s separate income is $6,000,000 and Sun Corporation’s net income is $1,000,000. Pam and Sun declare dividends in 2017 of $2,000,000 and $600,000, respectively.

The stockholders’ equity of Sun consists of the following (in thousands):

December 31, 2016 December 31, 2017 12% cumulative preferred stock, $100 par, callable at $105 per share $2,000 $2,000 Common stock, $10 par 4,000 4,000 Other paid-in capital 600 600 Retained earnings 1,400 1,800 Total stockholders’ equity $8,000 $8,400 REQuIRED 1. Determine the cost of Pam’s investment in Sun on December 31, 2016, if Sun has one year’s preferred dividends in arrears on that date.