Which of the following statements pertaining to preferred shares is correct?

Question

Whine purchased 80% of the outstanding voting shares of Dine Inc. on December 31, 2018. The balance sheets of both companies on that date are shown below (after Whine acquired the shares):





Also on December 31, 2018 (after the financial statements appearing above had been prepared) Chompster Inc., one of Whine's main competitors has agreed to acquire an equity interest in Dine Inc. As a result of the agreement, Dine Inc. would issue another 8,000 shares (over and above the 32,000 shares it currently has

outstanding) to Chompster for $20 per share.



The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of ten years from the date of acquisition.



Whine Inc. uses the equity method to account for its investment in Dine Inc. There were no unrealized intercompany profits on December 31, 2018.



A) If the preferred shares are non-cumulative, only the current year's Net Income

would be allocated to preferred shares, since dividends are never in arrears with

non-cumulative preferred shares.

B) If the preferred shares are participating, only the current year's Net Income would be allocated to the preferred shares.

C) If the preferred shares are participating, the current year's Net Income would be

allocated to the shares, only if the subsidiary is fully owned by the parent.

D) There can never be any dividends in arrears when preferred shares are

participating.

Answer 1

A) If the preferred shares are non-cumulative, only the current year's Net Income
would be allocated to preferred shares, since dividends are never in arrears with
non-cumulative preferred shares.