Chapter 9, Problem 9.6E

a.

To determine

Subsidiary preferred stock outstanding:many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

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

The preparation of journal entries recorded by C for its investments in T during 20X6.

Answer to Problem 9.6E

Particulars	Debit $	Credit $
To record purchase of T stock
Investment in T common stock	270,000
Investment in T preferred stock	80,000
Cash		350,000
(paid cash on purchase of T’s stock)
To record common stock dividends from T
Cash	25,500
Investment in T Common stock		25,500
(Received cash on account of dividends from T)
To record preferred dividends form T
Cash	6,400
Dividend income		6,400
(Received cash on dividends on T’s preferred stock)
To record equity method income
Investment in T common stock	40,500
Income from subsidiary		40,500
(Equity method income recognized on T’s stock)

Explanation of Solution

1. C’s investment in T Corporation is debited to investment accounts and payment of cash is credited.
2. Receipt of stock dividends :

Dividends paid   =  $50,000

Preferred dividends $\left(\$200,000\times 0.08\right)$ =  ($16,000)

Common stock dividends  =   $34,000

C’ share of stock dividends $\$34,000\times \text{0}.75$   =  $25,500

3. Receipt of Preferred dividends:

Preferred dividends $\$200,000\times 0.08$   =  16,000

C’s share   =  $16,000\times \text{0}.40$   =  $6,400

4. Investment in T common stock
Net income   =  $70,000

Preferred dividends  =  $16,000  =  $54,000

Investment in T commons stock $=\$54,000\times 0.75 =\$40,500$

b.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock, each type of security serves particular purpose, subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

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

The elimination entries needed to prepare consolidated financial statement for C Corporation for December 31, 20X6.

Answer to Problem 9.6E

Particulars	Debit $	Credit $
Elimination of income from subsidiary
Income from subsidiary	40,500
Dividends declared common stock		25,500
Investment in T common stock		15,000
(Income from subsidiary eliminated)
To eliminate dividend income form subsidiary
Dividends income − preferred	6,400
Dividends declared − preferred		6,400
(dividends income from subsidiary eliminated)
Assign income from non-controlling interest
Income to Non-controlling interest	23,100
Dividends declared − preferred stock		9,600
Dividends declared − common stock		8,500
Non-controlling interest		5,000
(Income assigned to non-controlling interest)
Eliminate beginning investment balance
Common stock − T company	150,000
Retained earnings January 1	210,000
Investment in T common stock		270,000
Non-controlling interest		90,000
(beginning investment balance in T’s common stock eliminated)
Eliminate subsidiary preferred stock
Preferred stock − T company	200,000
Investment in T preferred stock		80,000
Non-controlling interest		120,000
(Investment in subsidiary preferred stock eliminated)

Explanation of Solution

1. Eliminate income from subsidiary
Net income   =  $70,000

Preferred dividends  =  $16,000

  =  $54,000

Investment in T commons stock $=\$54,000\times .75 =\$40,500$

Receipt of stock dividends:

Dividends paid   =  $50,000

Preferred dividends ($200,000 x 0.08) =($16,000)

Common stock dividends  =   $34,000

C’ share of stock dividends $\$34,000\times .75 =$$25,500

Income from subsidiary is eliminated by debit entry and dividends form common stock and investment in T is credited

2. Dividend income on preferred stock is eliminated by setoff against dividends declared
3. Income from non-controlling interest $\left[\left(\$70,000–16,000\right)\times .25\right]+\left(16,000\times .60\right)=23,100$
4. Eliminate beginning balance by debiting common stock and retained earnings

$\left(\$150,000+210,000\right)\times \text{0}.75=\$270,000$

Non-controlling interest $\left(\$150,000+210,000\right)\times \text{ 0}.25=\$90,000$

5. Elimination of subsidiary preferred stock by debit entry and investment in T preferred stock and non-controlling interest is credited.

Investment in T preferred stock is given as $80,000 and remaining balance of $120,000 is non-controlling interest