 Hello and welcome to the session in which we would look at the consolidation process when the subsidiary has Preferred stock on its equity section. So when you buy a company you technically buy its equity section and generally speaking so far What we saw there are basically three types of accounts that we have to deal with common stock Additional paid in capital and retained earning and to just to summarize common stock and additional paid in capital is What the investors invested in the company and retained earnings is the amount that the company earned and kept Over the years retained earnings. Those are the two main section of stockholders equity How about if the company has preferred stock, which is that's possible a company could have common stock the company could have preferred stock well Guess what's gonna happen? You're gonna buy those preferred stock as well But the preferred stock is a separate security than common stock Preferred stock is a contract based Contract based security. So when you buy the company, you're gonna buy the common and you're gonna pay something separately for the preferred Now preferred stock not owned not purchased by the company by the parent company will become part of the non-controlling Interest and initially recorded at the acquisition date fair value So what's gonna happen now? You are buying two different things. You are buying the common stock additional paid in capital retained earning You are also buying paying a separate price for the preferred stock So this preferred stock adds a new dimension to the consolidation process Since preferred stock is listed as a separate component on the equity section Now I'm gonna do a quick review about preferred stock really quick But if you really want to learn about preferred stock You want to go to my financial accounting course where I talk about preferred stock in the tails as well as Intermediate accounting at this point I'm just gonna mention what you need to know about preferred stock for the purpose of this Advanced accounting course before we proceed any further. I have a public announcement about my company far hat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses Broken down by chapter and topics my resources consist of Lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today No obligation no credit card required Preferred stock it's contract based security so you can put anything in that contract It's between the company he is showing company and the investor the person that wants to buy the person or the investment company Generally speaking preferred stock are non voting stock simply put if you own preferred stock you cannot vote You are not really a true owner Generally speaking Preferred stock they are called preferred because they have a preference in terms of dividend Simply put when the company pays dividend if there's any preferred stock any money declared as part of dividend first Satisfies the preferred shareholders and anything left goes to the common shareholders We have again preferred comes in many flavors. There is cumulative and non cumulative one part of it There are many there are cumulative non cumulative convertible callable so on and so forth But this is not a session about preferred stock So what is the difference between? Preferred cumulative versus non cumulative cumulative means If we did not pay you dividend this year, so let's assume this is year one year two year three So if we did not pay dividend this year if we did not pay dividend in year two But if we happen to make a lots of money in year three if the preferred is cumulative We have to go back and pay year one and year two first then we pay year three So kind of we owe you the money, but it's never a liability, but we owe you the money non cumulative Well, guess what if the preferred non cumulative we don't worry about year one and year two We'll just pay a year three and we move on so obviously the investor will prefer will prefer cumulative now For the purpose of this lesson We don't we don't take into account the non cumulative part. We only say I'm sorry, we don't take into account the cumulative simply put when we're when we are accounting for dividend when we are Computing the dividend for the consolidation purpose. We only say the dividend for this year So simply put the now the cumulative is not relevant is not relevant for our purpose for this session Dividend is also stated as a percentage of a par value. So you need to know how the dividend rate So this is called basically the dividend rate so How do we Determine the dividend amount for example, we would say we have preferred dividend with a $100 par Value 5% So the dividend amount is 5% out of the $100 so the dividend per one preferred stock is $5 so this is how the dividend is declared on a preferred stock Sometime the dividend is stated as a dollar amount. For example, they'll tell you you'll get $2 per share Most of the time it's a percentage of the par value, but it could also be a stated amount instead for the acquisition process we measure the The purchase 100% at fair value and this applies to preferred stock as well So any shares not purchase will become part of the non controlling interest But we value everything at 100% Now the best way to illustrate this concept is to actually look at a complete example and see how the process work Let's assume we're buying a sub a parent is buying a sub and this is the stockholders equity of the sub They have common stock of 300,000 preferred stock of 100,000 Notice they have $100 par value 8% it means each shareholder will get $8. We have 1000 shares So when you pay the preferred every year you have to pay them you owe them $8,000 per year Additional paid in capital 400,000 retained earning for 16 total equity is 1,216,000 Now here comes the parent company that wants to purchase this subsidiary They bought 80% of the outstanding common stock and 60% of the preferred stock so notice what's happening here. We're buying the common stock Then we are buying the preferred stock separately The sub owns an equipment undervalued by 100,000 and nothing else everything else Book value equal to fair value the parent company paid 1 million for the common stock 62,400 for the preferred stock. So let's go ahead and start to determine. What is the non controlling interest? Well, let's first find the total value for the common stock We paid 1 million to buy 80 percent 1 million divided by 80 percent the total value of common stock of the company is 1,250 well if the of this amount 1 million we paid for at 80 percent What's left is 250 250 is the fair value of the non controlling interest common stock We'll have to do the same thing for the Preferred stock will take the preferred stock the amount that we paid divided by 60 percent We find the total value of the preferred stock from the total value. We deduct 62,400 our 60 percent the 40 percent left is 41,000 600 the fair value of the non controlling interest Preferred stock now, what is the total value for the whole company preferred and common the common stock is 1,250 the preferred stock 104 the total value for the whole company is 1,384 Now this is the total value the fair value the book value of the company is right here So we're gonna compare the fair value to the book value and determine the difference. The difference is 138,000 now we are told in the problem that this company has A piece of equipment that's undervalued by 100,000 therefore of the 138 we're gonna allocate 100,000 to the equipment and 38 remainder that's gonna go to goodwill and that's it pretty much now. We are ready to prepare Consolidation entry when we consolidate we have to remove the equity of the sub. So we're gonna debit common stock sub 300,000 gone preferred stock 100,000 gone additional paid in capital 400,000 gone retained earnings 400,000 gone all the subs account has to go away. We have to debit those accounts Also, we're gonna have to put the equipment on the books the additional 100,000 of equipment Then we're gonna have to put the goodwill 38,000 Then we're gonna remove the investment and subs common stock, which is we paid the million Then we move remove the investment and the sub preferred stock, which we paid 62,400 then we established an uncontrolling interest of 291 16, which is equal to the 250 plus 41,600 so those two together will give us this amount 291 600 so this is how we establish The non-controlling interests and we remove the equity We put the additional equipment the value of the equipment record goodwill and remove the investment Now let's assume the sub earned for that particular year year x 1 200,000 and the clear dividend So notice here I did not tell you what the amount of the dividend But I already showed you earlier how to compute the dividend so of the two of the 200,000 8,000 which is 100,000 times 8% now you said didn't you say $8 per share and we have 1000 shares the same thing that we can do we can take The par value of $100 times 1000 shares times 8% which is here. It's 100,000 Or we can say $8 per share 8% 8% Of $100 is $8 Times a thousand any way you know it any way you do it. It doesn't matter the amount of The preferred dividend is 8,000 Now of this 8,000 remember 60% of it goes to the parent company because the parent company owns 60% of the preferred stock of the 200,000 now the 200,000 Goes to the preferred guess what the remainder now is technically net income that belongs to the Common shareholders now remember the common shareholders of this amount 191 20% belong to the NCI now, let's go ahead and Kind of reconcile everything We said 8,000 of the preferred 40% goes to the NCI which is 3,200 60% goes to the parent. This is how we distributed the preferred Of the 192 20% is the non controlling interest 38,400 and the remainder 80% goes to the parent 153 Therefore the controlling interest what the non controlling interest sorry gets 41,600 And this is 158 400 is the parent share and hopefully if you add them up they should add up to 200,000 What should you do now go to far hat lectures and work at additional mcqs look at additional exercises That's going to help you understand this topic Advanced accounting by its nature. It's advanced. It's a little bit challenging You already took financial intermediate now you're at advanced. It doesn't get more advanced than that Study hard. Good luck. Accounting is worth it And stay safe