In this article we will discuss about the Accounting Treatment Relating to Preference Shares of a Subsidiary Company.

A subsidiary company may have issued equity shares as well as preference shares. In such a case, irrespective of the percentage of preference shares held by outsiders, the minority interest will include the paid up value of the preference shares held by the outsiders plus the dividend accrued thereon to the date of consolidation. Out of the profits of the subsidiary company, first preference

dividend accrued (remember preference shares are always cumulative) on all the preference shares will be deducted (and apportioned between holding company’s share and minority shareholders’ share depending upon the percentage of preference shares held by the two parties) and the remaining profit will be apportioned between the minority shareholders and the holding company in the ratio of equity shares held by them.

If the subsidiary company’s Profit and Loss Account shows a debit balance, no provision will be made for arrears of preference dividend. Preference shareholders are not called upon to bear any part of the loss; the whole debit balance is apportioned between minority interest and holding company’s share in the ratio of equity shares held by them.


Excess of amount paid by the holding company for acquiring preference shares over their paid up value is treated as cost of control.

Illustration 1:

On 1st April 2011 H Ltd. acquired 80% equity shares and 30% preference shares of S Ltd. for Rs 1,95,000 and Rs 30,500 respectively on which date S Ltd.’s General Reserve and Profit and Loss Account showed balances of Rs 30,000 and Rs 4,000 respectively.

On 31st March, 2012 the balance sheets of the two companies stood as follows:—