Effect of Subsidiary Preferred Stock Snow Corporation issued common stock with a

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 ?

Please be detailed and explain why the missing information is required.

Explanation / Answer

Solution

Step1) Allocation of consolidated Income:Income is consolidated as per the net income documented by both the company

a). Shares held by the parent company:The acquirer consolidates 100% of the subsidiary's income and expenses. Net Income of the holiding and subsidiary is clubbed in the books of holding company.

b. Shares not held by the parent company: Shares not held by the parent companyare known as noncontrolling interest or minority interest. Any net income attributable to a noncontrolling interest is subtracted from the net income attributable to the consolidated entity to give the net income attributable to the parent on the consolidated income statement.

Step 2). Factors to be considered:

When a parent has legal control of a subsidiary, the parent consolidates the subsidiary's financial results with its own. Generally company acquries common stock which gives them voting rights, ownserhip rights and not preferred stock. Ownership of > 50% of the subsidiary's voting common stock generally implies legal control.

Step 3). Missing Information required

a). Total number of common shares and preferred stock of subsidiary and the number of shares owned by parent company

b). Type of preferrence share: Whether preference share is cumulative or non-cumulative; so as to deduct past dividend if not paid from net income in case of cumulative preference shares

c). Rate of preference dividend

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