Net income of an investee with preferred stock outstanding is first allocated to preferred stockholders based on the preferred stock contract.

Question

Quizplus · Accepted Answer

Preferred stockholders have a priority claim on a company's earnings and are entitled to receive dividends before common stockholders. Hence, the net income of an investee with preferred stock outstanding is first allocated to preferred stockholders as per the preferred stock contract. Any remaining net income would then be allocated to common stockholders.

Net Income of an Investee with Preferred Stock Outstanding Is