SUBSIDIARY PREFERRED STOCK, CONSOLIDATED EARNINGS PER SHARE,
AND CONSOLIDATED INCOME TAXATION
Answers to Questions
Flora’s investment income:
Arom’s net income
Less: Preferred income ($500,000
Income to common stockholders
Flora’s percentage owned
Flora’s investment account balance
(equal to book value):
Arom’s stockholders’ equity
Less: Preferred equity (no arrearages or call premiums)
Flora’s percentage ownership
Investment account balance
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.
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
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.
There is no difference between consolidated and parent company EPS.
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.
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.
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
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.