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Hello sir,
I have some problems about dividend in consolidated statement.First question from December 2016:
Laurel Co’s investment income consists of:
– a dividend of $200,000 received from Artic Co, a 25% owned associate which it has held for several years. The profit after tax of Artic Co for the year ended 30 September 20X6 was $2.4mthe answer : Income from associate (2,400×25% based on underlying earnings) in the consolidated statement of profit or loss
Second question from March/June 2017:
The investment in Amery Co represents 30% of its voting share capital and Dargent Co uses equity accounting to account for this investment. Amery Co’s profit for the year ended 31 March 20X6 was $6m and Amery Co paid total dividends during the year ended 31 March 20X6 of $2m. Dargent Co has recorded its share of the dividend received from Amery Co in investment income (and cash).
the answer : Unrecorded share of Amery’s retained profit ((6,000 – 2,000) x 30%) in the consolidated retained earnings (Consolidated statement of financial position)
Why 1st question ignore the dividend form the income , but 2nd question less the dividend from the retained earnings?
In the first question, Laurel has taken its share of Artic as the investment percentage (25%) of Artic profit for the year after tax … and that’s what we do when dealing with an investor’s share of an associate
Now look at Dargent – it has already recorded its 30% share of $2 million dividend
But you’ll remember from your F3 days that dividends are paid out of after tax profits
So when Artic made a profit after tax for the year of $6 million, Dargent is going to account for 30% of that figure ie 30% x $6 million
But Dargent has already included within its financial statements investment income from Artic of 30% of the $2 million dividend
So all we now need to do is account for the 30% of $4 million
Therefore, in total, Dargent will account for 30% of $6 million ie its percentage share (30%) of the Artic profit after tax
Both answers are consistent with each other and with the accounting standard that covers equity accounting when looking at associate companies
Is that better?
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