Beams9eSM_ch10

Beams9eSM_ch10 - Chapter 10 247 Chapter 10 SUBSIDIARY...

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247 Chapter 10 SUBSIDIARY PREFERRED STOCK, CONSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION Answers to Questions 1 Flora’s investment income: Arom’s net income $ 300,000 Less: Preferred income ($500,000 × 10%) (50,000 ) Income to common stockholders 250,000 Flora’s percentage owned 60 % Investment income $ 150,000 Flora’s investment account balance (equal to book value): Arom’s stockholders’ equity $2,500,000 Less: Preferred equity (no arrearages or call premiums) (500,000 ) Common equity 2,000,000 Flora’s percentage ownership 60 % Investment account balance $1,200,000 2 The payment of two years preferred dividend requirements would not have affected Flora’s investment income. Since the preferred stock is cumulative, the preferred dividend requirements are deducted from net income each year regardless of whether preferred dividends are declared. 3 The preferred stock of a subsidiary does not appear in a consolidated balance sheet. If there is a noncontrolling interest in the preferred stock, it is reported as a noncontrolling interest in the consolidated balance sheet. In part a, the investment in preferred is eliminated against the preferred equity and there is no noncontrolling interest in preferred. When 50 percent of the stock is held by the parent (part b), the investment in preferred is eliminated against 50 percent of the preferred equity and the other 50 percent is reported as a noncontrolling interest. In part c, all of the preferred stock is reported as a noncontrolling interest. 4 Assuming that the parent does not hold any of the subsidiary’s preferred stock, the computation of noncontrolling interest expense for an 80 percent owned subsidiary is 100 percent of the income allocated to preferred plus 20 percent of the income allocated to common. 5 There is no difference between consolidated and parent company EPS. 6 An investor company’s EPS computations must reflect the potential dilution of an equity investee’s common stock equivalents and other potentially dilutive securities if the effect is material. 7 Procedures applied in computing a parent company’s EPS computations are the same as those for a corporation without equity investments except when the subsidiary has outstanding common stock equivalents or other potentially dilutive securities. 8 Subsidiary EPS computations are only needed when computing diluted EPS, never for basic EPS, and then it is only needed when the subsidiary has potentially dilutive securities convertible into subsidiary common stock. 9 If a subsidiary has dilutive securities convertible into subsidiary common stock, the parent’s diluted earnings are adjusted by replacing the parent’s equity in subsidiary realized income with its equity in subsidiary diluted EPS. Alternatively, when subsidiary securities are convertible into the parent’s common stock, the parent’s diluted earnings and common shares are adjusted as if the dilutive securities had been issued by the parent company. 247
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This note was uploaded on 01/29/2009 for the course BA 459 taught by Professor Slattery during the Spring '09 term at Southern Oregon.

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Beams9eSM_ch10 - Chapter 10 247 Chapter 10 SUBSIDIARY...

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