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Chap009 - Chapter 09 Consolidation Ownership Issues CHAPTER...

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Chapter 09 - Consolidation Ownership Issues CHAPTER 9 CONSOLIDATION OWNERSHIP ISSUES ANSWERS TO QUESTIONS Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that used in eliminating the common stock of the subsidiary. For those preferred shares held by the parent company, a proportionate share of subsidiary income and net assets assigned to the preferred shares is eliminated against the balance in the parent's investment account. Subsidiary income and net assets assigned to preferred shares not held by the parent are included as a part of the noncontrolling interest along with the balances assigned to noncontrolling interest for common stock not held by the parent. The claim of the preferred shareholders normally is computed before the common stock is eliminated so that any priority claim associated with the preferred stock can be properly recognized and assigned to the correct shareholder group. Q9-2 All preferred shares held by the parent are eliminated against the balance in the investment account. Those held by unrelated parties are included in the total assigned to the noncontrolling interest. Q9-3 Preferred dividends normally are deducted in arriving at income available to common shareholders. When preferred dividends are paid by the subsidiary to shareholders other than the parent, the income accruing to the common shares held by the parent company is reduced. Therefore, they must be deducted to arrive at income available to the parent company shareholders. No preferred dividends are deducted if the parent company owns all the shares or if no dividends are declared and the preferred stock is noncumulative. Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call premium and the net assets of the subsidiary will be reduced by the amount of the premium. Because it is more conservative to assume the call premium will be paid, the amount of the premium normally is added to the claim of the preferred shareholders and deducted from the equity assigned to the common shareholders whenever consolidated statements are prepared. Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has preferred stock outstanding, the claims of the preferred shareholders, including dividends in arrears and participation rights held by preferred shareholders, must be taken into consideration in determining the fair value of net assets available to common shareholders. These items, when deducted from the fair value of the identifiable assets of the acquired company, will reduce the amount of net assets assigned to common stock and potentially increase the amount reported as goodwill.
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