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Hello Mike,
When the dividend is received, the parent records it by:
Dr. Bank
Cr. Investment in AssociateThe logic behind crediting the investment in associate is that the net assets of the associate decrease when it pays out dividends(dividends are paid out from profits).
So the parent debits investment in associate with its share of profit because it increases the net assets, LIKEWISE, It credits investment in associate with its share of dividend because it decreases the net assets.
Let’s consider the scenario that the dividends were actually reported on the income statement, as you suggested above (i.e. credit investment income); then, this means that the investing company (the parent), would recognize its share of the profits that the associate company had; and remember that dividends are distributed from the same retained earnings which the parent company has already recorded. The result would be that the same income would be included twice.
Hope this sounds more accurate; right?
From my own experience, when we receive a dividend from our associate company we normally
Dr: Cash received/ dividend receivable
Cr: Investment in Associate
This is because the dividends paid by the associate is paid out of the retained earnings which we have already accounted for and increased our investment in associate; hence since the dividend is paid out, it must reduce the value of our investment.
Remember; when we record the share of profit from associate, we normallyDr: Investment in Associate, by that figure of share of profit
Cr: Share of profit from associate, by the same figure of profit recorded above.Don’t get confused with these little words please!!
1 for 3 means that One new share for every three shares held…..therefore if you were holding say 10,000 shares, you will need to use the cross multiplication technique:
1 new shares= 3 shares held
? = 10,000 shares
therefore apply cross multiplication technique where you will have to multiply 1 by 10,000 and then divide by 3…..Likewise, if it is 3 for 1 means that 3 new shares for every 1 share held……. therefore if you were holding say 10,000 shares, you will need to use the cross multiplication technique as well:
3 new shares= 1 share held
? = 10,000 shares
therefore apply cross multiplication technique where you will have to multiply 3 by 10,000 and then divide by 1…..
It is just as simple as this!!
Hope this technique will make you comfortable!!!!Option 1 is more fair…
This is because once the parent co. has sold goods to subsidiary, it means the parent will have unrealized profit on NCA still held at year end….hence we need to remove this…
Again, the subsidiary will have already charged the depreciation on that NCA based on the transfer price and hence overcharged that asset, and therefore we will need to add it back to retained earnings of the Subsidiary………..
The overall net impact of this is that, in the group financial statements (consolidated), the unrealized profit to be debited by parents in its retained earnings will be added with the additional depreciation to be credited to subsidiary’s retained earnings, and the overall impact will be a NET UNREALIZED PROFIT, which is something like -ve plus +ve………….Waoh…Ansi..thats good!! I also passed the F6 paper by 64%….Thank you a lot for your organization and management in F6 discussions..Iwill now be in the P-Level discussions as I have managed to pass all the four papers I set for. I will real miss you Ansi….
