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 ?

Answer 1

In practice, the parent company does not hold all the common and preferred stock of the subsidiary company and the consolidated net income is calculated on the basis of income comprising of part of common stock and preferred stock. But in such cases, the calculation of consolidated net income is done on the basis of net income shown by the subsidiary company.

Following information is required to determine the amount of income comprised to common stock and preferred stock:

1. The preferred stock rate of dividend per share
2. The number of share owned by the preferred stock outstanding held by the parent company
3. Whether preferred stock is cumulative or non-cumulative
4. In case of non-cumulative preferred stock, the amount of preferred dividend declared.

Conclusion, the parent company does not hold the preferred shares of its subsidiary company. Hence, now the controller can calculate the consolidated net income.