Thursday, May 31, 2012

Accounting for subsidiary

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Q0.15 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.

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Example

„X Company A purchases company B in 00 for $5million

„X Company B gives shareholders 10million in dividends from profits in 001.

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 B¡¦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 owner¡¦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 001, 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

Subsidiary¡¦s Books

DR P&L Appropriation X

CR Cast at Bank X

Parent¡¦s Books

DR Cash at Bank X

CR Investment in Subsidiary X

Q0.0 type question

Summary of Facts

- 0/4/X Bach Ltd acquired shares in CPE Ltd and PDQ Ltd. for

$6500 each

- PDQ Ltd dividend announced 1/, 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 0 April 0x

Fair Value of Identifiable Net Assets (INA) = $6000

- Share capital $4000

- Reserves $0

- Retained profits $000

- Dividend payable $0

$6000

Cost of Acquisition = $6500

Goodwill = $500

Ammortisation = $5 p.a

(ii) Acquisition Analysis PDQ Ltd

At 0 April 0x

Fair Value of identifiable Net Assets (INA) = $6000

- Share capital $000

- Reserves $1500

- Retained profits $1000

- Dividend payable $500

$6000

Cost of Acquisition = $6500

Goodwill = $500

Ammortisation = $5 p.a

Assuming Goodwill was amortised for 0 years Straight Line in accordance with AASB 101 Accounting For Goodwill.

Consolidation Adjustment (In Bachs Books)

(1) At 0 April 0X

(i) Acquirement CPE Ltd

Retained profits DR $000

Share capital DR $4000

Reserves DR $0

Dividend payable DR $0

Goodwill DR $500

Shares in CPE Ltd CR $6500

(ii) Acquirement of PDQ Ltd

Retained profits DR $1000

Share capital DR $000

Reserves DR $1500

Dividend payable DR $500

Goodwill DR $500

Shares in PDQ Ltd CR $6500

() At 0 May 0X

(i) CPE Ltd

Operating Profit Before Income Tax DR $.0

Retained profits DR $000

Share capital DR $4000

Reserves DR $0

Goodwill DR $47.1

Dividend Paid CR $500

Shares in CPE Ltd CR $6000

(ii) PDQ Ltd

Operating Profit Before Income Tax DR $.0

Retained profits DR $000

Share capital DR $000

Reserves DR $1500

Goodwill DR $47.1

Dividend Paid CR $500

Shares in PDQ Ltd CR $6000

$5 Amortisation per annum ¡� 1 months = $.0



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