A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned?
A) Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values.
B) There is no allocation to the non-controlling interest because there are no dividends in arrears.
C) Income is assigned as 40 percent of the preferred stock dividends.
D) Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends.
E) Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends.

Question

Quizplus · Accepted Answer

The non-controlling interest is calculated based on the percentage of ownership in the subsidiary. Since the parent owns 60% of the preferred stock and 70% of the common stock, they effectively own 70% of the subsidiary's total equity. According to the question, the current year's dividend has already been paid, so there are no dividends in arrears. Therefore, the non-controlling interest is assigned as 40% of the preferred stock dividends (i.e., 60% x 40% = 24% of the total dividends paid) plus 30% of the subsidiary's income after subtracting all preferred stock dividends. This is because the preferred stock is non-cumulative, so there are no dividends in arrears to subtract from the subsidiary's income. Therefore, the correct answer is D.

A Parent Acquires 70% of a Subsidiary's Common Stock and 60