B. Woods Chapter 10 - Chapter 10 SUBSIDIARY PREFERRED...

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75 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 x 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 minority interest in the preferred stock, it is reported as a minority interest in the consolidated balance sheet. In part a, the investment in preferred is eliminated against the preferred equity and there is no minority 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 minority interest. In part c, all of the preferred stock is reported as a minority interest. 4 Assuming that the parent does not hold any of the subsidiary's preferred stock, the computation of minority 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.
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76 Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation 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. 10
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This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.

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B. Woods Chapter 10 - Chapter 10 SUBSIDIARY PREFERRED...

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