Question

The parent company acquires all of a subsidiary's common stock but only 70 percent of its preferred shares. This preferred stock pays a 7 percent annual cumulative dividend. No dividends are in arrears at the current time. How is the noncontrolling interest's share of the subsidiary's income computed?

a. As 30 percent of the subsidiary's preferred dividend.
b. No allocation is made because the dividends have been paid.
c. As 30 percent of the subsidiary's income after all dividends have been subtracted.
d. Income is assigned to the preferred stock based on total par value and 30 percent of that amount is allocated to the noncontrolling interest.

Answer 1

The noncontrolling interest's share of the subsidiary's income is 30 percent of the subsidiary's income after all dividends have been subtracted, reflecting their partial ownership in the subsidiary's preferred shares.

Step-by-step explanation:

When calculating the noncontrolling interest's share of the subsidiary's income, several considerations need to be made. In this case, where the parent company owns all of the subsidiary's common stock but only 70 percent of its preferred stock, and the preferred stock pays a 7 percent annual cumulative dividend, the income for the noncontrolling interest needs to be computed based on their ownership percentage in the preferred shares. The correct computation is as follows:

(c) As 30 percent of the subsidiary's income after all dividends have been subtracted.

This means that the noncontrolling interest's share is not just the portion of the dividends on the preferred stock they did not receive (as would be suggested in option a), but rather, it is their share of the subsidiary's total income after the preferred and any common dividends have been allotted.