Question

Effect of Subsidiary Preferred Stock

Snow Corporation issued common stock with a par value of $100,000 and preferred stock with a par value of $80,000 on January 1, 20X5, when the company was created. Klammer Corporation acquired a controlling interest in Snow on January 1, 20X6.

Required:

What does Klammer's controller need to know about the preferred stock to determine the proper allocation of consolidated net income to the controlling and noncontrolling interests? What ethical factors should be considered, if any ?

Please be detailed and explain why the missing information is required.

Answer 1

Solution:

Step1) Allocation of consolidated income: If the company is holding both common shares which are basically equity shares and preference shares then the allocation of consolidated income is done on the basis of net income in the books of both the company.Income will be consolidated as per below points:

a). Parent company holding part of common stock and prefered stock:The acquirer consolidates 100% of the subsidiary's net income. Consolidated Net income will be the income of holding company and Net Income of the subsidary company as shown in the books of both the company

b). Shares which are not owned by parent company: But the shares which are held by the other shareholders is shown as non controlling interest in the books of the parent company.Any net income attributable to a noncontrolling interest is subtracted from the net income attributable to the consolidated entity to give the net income attributable to the parent on the consolidated income statement.

Step 2). Factors to be considered

When a parent has legal control of a subsidiary, the parent consolidates the subsidiary's financial results with its own. For controlling purpose generally company acquires common stock which gives parent ownership rights and voting rights and not preferred stock. Ownership of > 50% of the subsidiary's voting common stock generally implies legal control.

Step 3).Information Required:

a). Total Number of shares held by the Klammer Corporation comprising common stock and prefrered stock as well shares not owned by the Klammer Corporation for determining non controlling interest

b). Dividend declared by the companycfor equuity shareholders and rate of dividend for preference shareholders for analysis of profit.

c) Type of preference shares: In case preference are cumulative and dividend is not paid to the shareholders in the past year