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Hi!
I am a bit confused as to the treatment of dividends received from associates during consolidation
The entry goes as follows : Dt. Cash; Cr. Investment in Associate.
Also, it is as I believe (in the individual financial statement) Dt. Cash and Cr. Income Statement (or Retained Earnings)My confusion lies during the consolidation process, does the dividends received affect Group Retained Earnings? ( as in do we take the net of 1. Share of Associate Profit and 2. Dividends Received to Retained Earnings? or do we only include Share of Associate Profit in the Group Retained Earnings? and ignore dividends received when calculating group retained earnings?)
It would be much appreciated if you could explain using double entries.Thank you for taking your time to read my silly confusion.
Cr Investment in associate
When we do consol, associate we do equity method
Cost of investment
+ % of profit
+ adjustmentWe only present single line item
When the associate either proposes or pays a dividend, the investor (I’ll call it the parent here, even though technically it isn’t) will record the receivability within their own records.
Working W5A, Investment in Associate, is calculated as :-
Investment at cost
+
Share of Associate post-acq RETAINED
–
any impairment
In working W3, consolidated retained earnings, we need to show the group’s share of the associate’s post-acquisition RETAINED earnings – so the dividend proposed should be deducted from the associate’s retained earnings before we calculate our share
In the Profit or Loss account we are going to show, as a single line entry, “Share of associate’s profits” and this is calculated as:-
Our share of
this year’s
associate
adjusted (for eg pups)
time apportioned (for a mid-year acquisition)
profit after tax (ie BEFORE any dividend appropriation)
Does that make it any clearer?
This makes it crystal clear! MikeLittle, you are amazing! Your explanation was clear and concise. Thank You! for taking time answering my doubt.
mike
what happens when the dividends are paid instead of proposed? like for this scenario below:
“On 1 October 2013, Penketh also acquired 30% of Ventor’s equity shares. Ventor’s profit after tax for the year
ended 31 March 2014 was $10 million and during March 2014 Ventor paid a dividend of $6 million. Penketh
uses equity accounting in its consolidated financial statements for its investment in Ventor”do we deduct 10,000 – 6000 and then multiply this with our share of profits? this will be (4000*30%) = 1200
in the bpp text book, they have done it like this. is that right?
Working W5A?
Cost
+
Share of post-acq RETAINED
–
any impairment
There used to be a rule that said that profits accrued evenly through the year and so too did dividends accrue evenly through the year.
But IASB decided that this was silly so nowadays a dividend comes out of the year’s profits which are then time-allocated
So, yes, I would agree with the BPP answer
thanks mike.
so 600 will go to PNL right after (10,000 profit after tax – 6000 dividends paid) (which gives 4000 net then time allocation /2 = 2000 * 30% share)
if there is any pup (parent selling to associate) then will this pup will be deducted from this 600 or will it be deducted from Parents cost of sales?
my concern is that the pup is coming out to be 900 but if i deduct this pup from share of profits (which is 600) then i will get a negative 300 which is actually share of losses from associates
“or will it be deducted from Parents cost of sales”
Deduct from parent’s cost of sales, but only deduct the group’s share of the pup. I presume the 900 is the full amount of the pup. So the adjustment you need to make is 30% x 900 = 270
thanks mike
the 900 wasnt the full amount. the full amount was 3000. i got 900 after getting p share which was 3000 * 0.3 = 900.
thanks mike for clarifying this.
i calculated both associate profits (30% of 10,000 – 6000 dividends * 6 month time factor) and their pup of 900 (25% mark up on sales 15000 – all remained in inventory) correctly but apparently made mistake of deducting the pup from associate profits instead of cost of sales. this is the reason why my share of associate line was coming as negative because i was deducting this massive amount of pup from it.
Let me know….
Double entry of dividend received by associate/sub/parent.
Any teacher can teach .?Hi,
If the parent receives a dividend from the associate it will DR Bank/Dividend receivable CR Dividend receivable, which when we equity account for the investment in associate we will therefore reduce the investment in associate due to the CR posting.
Hope this helps.
Thanks
Hi,
Can you please post this in a new thread as my answer will just get lost within this very old thread.
Thanks
Chris
investment in associate account ( t-shape )
Balance b/d (2018) 120
Balance c/d (2019 170
Share of profit of associate company 40According from above i need to know how to do the ledger. Normal there would be dividend received if we do in ledger but in this case if you see if i add 120+40 = 160 but 2019 is 170 so what about the remaining 10 . what is it
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