Chapter 9, Problem 9.3Q

To determine

Subsidiary preferred stock: preferred stockholders normally have preference over common shareholders with respect to dividends and the distribution of assets in liquidation. The right to vote usually is withheld from preferred shareholders.

During the preparation of consolidated financial statements, the amount of subsidiary stockholders ‘equity accruing to preferred shareholders must be determined before dealing with the elimination of the intercompany common stock ownership. If the parent holds some of the subsidiaries preferred stock, its portion of the preferred stock interest must be eliminated. Any portion of subsidiary preferred stock not held by the parent is assigned to non-controlling interest.

To explain : Why are the subsidiary preferred dividends that are paid to non-affiliates are deducted from earnings in calculating the consolidated net income? When is it not appropriate to deduct subsidiary preferred dividends in computing consolidated net income