Which of the following is a correct statement pertaining to consolidation of a subsidiary with preferred shares? O a. When preferred shares are cumulative, the preferred shareholders are only entitled to income equal to the yearly dividend, if the company has not suffered a loss for the year. O b. If the preferred shares are cumulative, the current year's net income would be allocated to the preferred shares only if dividends are declared in the year. O c. If the preferred shares are non-cumulative, the current year's net income would only be allocated to preferred shares if preferred dividends are declared. O d. If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declareD.
Which of the following is a correct statement pertaining to consolidation of a subsidiary with preferred shares? O a. When preferred shares are cumulative, the preferred shareholders are only entitled to income equal to the yearly dividend, if the company has not suffered a loss for the year. O b. If the preferred shares are cumulative, the current year's net income would be allocated to the preferred shares only if dividends are declared in the year. O c. If the preferred shares are non-cumulative, the current year's net income would only be allocated to preferred shares if preferred dividends are declared. O d. If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declareD.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:### Understanding Preferred Shares in the Consolidation of a Subsidiary
In the process of consolidating a subsidiary that issues preferred shares, it is important to understand how preferred shareholders are treated based on the cumulative or non-cumulative nature of their shares. The following question and options explore the correct statement regarding the treatment of preferred shares during consolidation.
#### Question:
Which of the following is a correct statement pertaining to consolidation of a subsidiary with preferred shares?
**Options:**
a. **When preferred shares are cumulative, the preferred shareholders are only entitled to income equal to the yearly dividend, if the company has not suffered a loss for the year.**
b. **If the preferred shares are cumulative, the current year's net income would be allocated to the preferred shares only if dividends are declared in the year.**
c. **If the preferred shares are non-cumulative, the current year's net income would only be allocated to preferred shares if preferred dividends are declared.**
d. **If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declared.**
#### Explanation:
- **Cumulative Preferred Shares:**
- These shares accumulate unpaid dividends. If a company does not declare dividends in a given year, the unpaid dividends are carried over to future years. Preferred shareholders must be paid all accrued dividends before any dividends can be paid to common shareholders.
- **Non-Cumulative Preferred Shares:**
- These shares do not accumulate unpaid dividends. If a company does not declare dividends in a given year, those dividends are essentially forfeited. Preferred shareholders are not entitled to claim unpaid dividends from previous years.
Understanding these principles helps in determining the correct allocation of net income during consolidation and ensures that the interests of preferred shareholders are appropriately considered.
For further reading on this topic, please refer to our comprehensive guide on [preferred shares and company consolidation](#).
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