Accounting for subsidiary
Q20.15 Explain why dividends paid from pre control profits ore reserves are not items of revenue for the controlling parent. How does the parent account for such dividends and what is the effect on the consolidation?
Depending on when a dividend is announced by the subsidiary will determine if the dividend was pre-control or post-control. If a dividend was announced before takeover, then the dividend is pre-control (before the parent company took control).
Pre-control can be described as the owner equity of a subsidiary existing at the moment the subsidiary becomes controlled or existing before an acquisition of the shared of an entity that is already controlled.
Example:
„X Company A purchases company B in 2002 for $25million
„X Company B gives shareholders 10million in dividends from profits in 2001.
In this example Company A took no part in the profits made by company B because the takeover was 1 year after the dividends were declared.
Dividend revenue is only included in post control (after the company has taken over) therefore for Company Bˇ¦s profits are pre-control dividends.
As Company A has become the controlling parent over B the net cost of the purchase of B is now $15million.
Effective Cost of Investment = Original Outlay less
The receipt of dividends from pre-control equities.
The reason why a controlling parent does not include the dividend as an item of revenue is because pre-control profits are not part of the consolidated ownerˇ¦s equity. This dividend represents partial refund of the investment cost, which was paid fro past profits and reserves, as well as for the share capital.
Company A had no part in the profits for 2001, because the takeover occurred one year later. In this case the dividends are seen to reduce the investment cost rather than increase Dividend Revenue.
General Journals for when a subsidiary pays a dividend from pre-control profits to parent
Subsidiaryˇ¦s Books
DR P&L Appropriation X
CR Cast at Bank X
Parentˇ¦s Books
DR Cash at Bank X
CR Investment in Subsidiary X
Q20.20 ************type question*************
Summary of Facts:
- 30/4/X9 Bach Ltd acquired shares in CPE Ltd and PDQ Ltd. for
$6500 each
- PDQ Ltd dividend announced 12/2, declared 16/4, paid May ($500)
- CPE announced $500 dividend in May
- Bach Ltd purchased PDQ shares cumulative.
Acquisition Analysis:
(i) Acquisition Analysis: CPE Ltd
At 30 April 20x9:
Fair Value of Identifiable Net Assets (INA) = $6000
- Share capital $4000
- Reserves $0
- Retained profits