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Can you help me with accounting treatment for dividends recived from subsidiary at mid-year acquisition?
For example, in dec-09 question, On 1 April 2009 Pandar purchased 80% of the equity shares in Salva (CSOFP date – 30 September 2006, post-acqn period = 6 month), On 26 September 2009 Slava paid the dividends $8000 (80% – $6400). In answer all the dividends reduce Investment income. Is it right? I thought that part of them refers to pre-acqn period and must reduce investments in subs.I don’t have the question Pandar. However, I can imagine that what you are facing is this. the parent has credited the dividend from Salva into the parent’s investment income in full. Only half of the dividend – the post acq half – should have been credited by Pandar into the Pandar I/S. The pre acq half should have been used to reduce the Investment in Salva Account in Pandar’s records.
So, step 1, take half out of investment income and reduce the “Cost of Investment”
Step 2, take out the other half – because on consolidation, we ignore the dividends from subsidiary.
That is ( possibly ) why the entire dividend has been taken out and reduced the investment income.
But I could be totally wrong – I don’t have the question.
Hope that helps
Ok, it reduces consolidated ret’d earning by whole amount of dividends in both cases but preacqn dividends must effect on goodwill. But in answer only investments at cost are appeared in the Goodwill calculation.
I just need to know who is wrong me or ACCA (where am I wrong- would probably be more correctly)
P.S. This in a question from ACCA site
QuestionNo, your English was correct “me or ACCA” is grammatically correct. “Where I am wrong” is equally correct, but in your original post, it should be “me”.
Are you sure that the pre-acq element has not been deducted? Maybe at the bottom of the working?
I just meant that my mistake is more likely than ACCA’s one.
There is only one point relating to dividends:
” (iii) Pandar has credited the whole of the dividend it received from Salva to investment income. “What we should do in such cases? Sould we write the correcting entry : Dr Investment Income Cr Investment in Salva(INCA) $3’200 (8000*80%*6/12) ?
Or we must just use given figures assuming that :
#1 Examiner always right.
#2 If Examiner wrong then look at the first paragraphNo, this sounds like an element of the dividend relates to a pre-acquisition period and therefore you are expected to calculate the pre-acq element and credit the cost of the investment, thereby arriving at a “Net cost of investment”
At least that’s what, I believe, should happen
I think they have taken it as only one mistake has been made and that was crediting the investment income… And thats why they only credited it….
yes, I’ve found the question now and cannot see any pre-acq divi adjustment. I still think I’m correct – the pre-acq element should have been taken to the cost of investment account and reduced the cost ( and therefore also the goodwill )
Why are we bothering about pre or post acquisition dividend? Dividend received from S should be eliminated, while dividend received from outside is recognised. I would have eliminated the entire amount – is this principle wrong?
Yes, that would be incorrect! For working 3, consolidated ret ears, the parent company’s own ret ears should include the post-acq dividend from the subsid. In addition, the pre-acq element should be deducted from the cost of the investment to arrive at a “net cost of investment”
Too easy simply to ignore the whole thing!
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