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Hello Mike
Hope you are fine.Would you please have a look at Robby (6/12) question. My question is about the treatment of dividend received and calculation of post acquisition profit of Hail in the retained earnings of the parent.
The useful information for my question are :
1- Robby acquires 80% of Hail
1- Dividend received from Hail was $2M and was credited to OCI.
2- Retained Earning s of Hail at the date of acquisition is $16M and at the year end is $27M.The answer says :
For dividend we should :
Dr OCI $2M
Cr Retained Earnings $2M.
I agree this!But my problem is with the calculation of post acquisition profit of Hail in the retained earning of Robby (the parent)!
The answer says : 11* 80% = 8.8
But I think it should be 11*80% – 2 = 6.8 (Because $2m was already received as dividend!)
Would you please explain why dividend is NOT deducted ??Thank you in advance
Kind RegardsOur share of the subsidiary for the purposes of calculating consolidated profit or loss is each line (time apportioned, if applicable) from revenue down to profit after tax
If it’s consolidate retained earnings for working W3 on csofp, then it’s H’s own + H’s share of S post-acq retained – goodwill impaired since acquisition (just our share)
In calculating H’s own, we include the dividend received by H from S because it’s H’s own retained earnings according to H’s own profit or loss.
In calculating our share of S, we apply our percentage holding to the RETAINED earnings of S ie after the dividend has been deducted
But if you were to apply our percentage to the pre-dividend profits and ignore the dividend received as recorded in the parent’s profit or loss, you’ll arrive at the same figure
Specifically to answer your question, the printed question says “the RETAINED EARNINGS” at the two dates so the dividend has already been deducted in arriving at the figure of $27. You are proposing to deduct it again! Besides, are you forgetting that the TOTAL subsidiary dividend was $2.5m?
Hello & Thank you for your answer Mr. Mike! 🙂
So you mean because the question is giving the RETAINED EARNINGS at the two dates , so in fact the dividend was already deducted to reach to $27M which the the rerained earnings at the year end.
Now would you please let me know the answer IF the question had given us the PROFIT AFTER TAX instead of the reatined earnings.
According to my understanding, in that case the answer would be : 11*80% – 2 =6.6 ?Many Thanks
RegardsIf the question had given us “profit after tax” it would also have had to give us the dividend. This could be done either by telling you the value of the dividend (in your example above it would be $2.5m and not $2m as per your post) or ……
……. by telling you the subsidiary retained earnings at the start and end of the year AND the profit after tax. The difference between retained earnings carried forward when compared with retained earnings brought forward + profit after tax must be the dividend (in the absence of any OCI matters)
If the profit after tax had been given as 11 then we would need to deduct 2.5 to arrive at retained for the year and then take 80% of that figure of 8.5
Better?
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