Dividends from Associate and Subsidiaries [ Consolidated SOFP and P/L ]

That’s exactly what it means – it’s the figure for retained earnings that you would see if you looked in the parent’s own accounting records

You cannot simply forget the fact that dividends have been paid. The paying company should record the payment in their own records and the receiving company should record the receipt in their records.

So the retained earnings figures for both companies will be affected. The RE of the payer will decrease and the RE of the receiver will increase.

These entries are NOT cancelled

What IS cancelled is the dividends in the statement of profit or loss. The investment income received by the parent from the subsidiaries and associates is not included in the consolidated investment income figure

The dividend paid will not be shown within any statement of profit or loss, neither in the subsidiary nor in the associate because the payment is recorded as a movement within statement of changes in equity – it’s not shown as an expense

I’m not sure whether this answers your question or not. If it doesn’t, post again

Which question Cheri?

In subsidiary records, Dr Retained Earnings Cr Dividend Payable

In parent records, Dr Dividend Receivable Cr Investment Income

In subsidiary records, Dr Dividend Payable Cr Cash

In parent records, Dr Cash Cr Dividend Receivable

Ok?

It’s an income account!

Before the recent changes in nomenclature, the “statement of profit or loss” was called the “statement of income” and before that it was a “statement of income and expense”

Now, there’s a bit of a clue in those two previous titles as to the sort of matters that are included in that statement!

What makes you think that Investment Income will feature in a statement of financial position?

There are three sets of financial statements involved here! The parent’s, the subsidiary’s and the consolidated statements.

Throughout the entire year the parent and the subsidiary will be following normal straight forward double entry principles and will be debiting and crediting in a way that Fra Luca Pacioli would be proud of.

In the parent, their bookkeeper will debit Cash and credit an account called Investment Income with the dividend received by the parent from the subsidiary

At the same time, the subbookkeeper (the only word in the English language with 4 consecutive double letters!) at the subsidiary will debit Dividends Paid and credit Cash

And then comes the year end and head honcho at the parent says to your pal,the newly qualified ACCA chief financial officer “Don’t we need to be preparing a set of group accounts?” and newly qualified looks a bit sheepish and says “Yes, I suppose so. I’ll try”

All goes well until CFO reaches Investment Income in the parent’s statement of income. “What to do with that income that we received from the subsidiary?”. So CFO phones you up and says “Arek, what should I do with the dividend that my head office company received from the subsidiary?”

And you reply “Ignore it! Simply don’t include it within the consolidated Investment Income figure. That dividend is an appropriation of this year’s profit after tax of the subsidiary and you should have consolidated all the subsidiary figures that are involved in calculating that profit after tax.

Do you see that, if you include that dividend as consolidated investment income, you would be double counting!”

And your pal, the CFO of the parent company says to you “Oh Arek. That is so obvious and yet I’ve always had a problem with that concept. Thank you so much, and say “Hi” to your mum and dad”

And you are the hero that saved the World from the dangers of double counting the dividend received from the subsidiary

(You consolidate the subsidiary’s revenue, cost of sales, administrative expenses, distribution costs, finance charges, finance income and taxation. So can you accept that you have consolidated the subsidiary’s profit after tax? And it’s from that subsidiary profit after tax that the subsidiary pays a dividend to the parent? To include that dividend within consolidated investment income is to double count!)

Better?

You’re welcome

Hi Richard

Please, do me a favour and give me a correct exam reference.

This is not a June 2012 exam question neither for international stream nor for the UK stream – at least, it’s not an exam question according to the past exam papers that I have just checked!

Hi Richard

It would never have crossed my mind to put a dividend from an investment into anywhere other than profit or loss!

I’m not sure why the (non)impairment matter has been included – maybe a bit of exam technique mark grabbing to show that you thought about it and calculated that no impairment was necessary

Finally, the dividend paid is not greater than this year’s income – if it had been, then the excess would have been coming out of pre-acquisition profits and that excess should then be used as a deduction in the calculation of the cost of the investment

Does that answer it?

You’re welcome!

Pardon my ignorance on this matter… i read in the previous posts that the dividend should be ignored to avoid double counting the income…

So what you’re saying is that the dividend income recognized by the parent company should be posted as “Investment Income” in the P&L Statement? How can we avoid the double counting?

Is it required to adjust dividend from subsidiary in computing net asset of subsidiary at DOA(wn.2) and in Group RE(wn.5).?if no..why?..

Hello there,
Strictly for SOFP, when you consolidate in Retained earnings profits from subsidiary do you consolidate it with including or excluding dividends (50 net profit, 30 after dividends).

Parent (after receiving dividend of 20)

Cash +20
Retained earnings +20
So i need to add an additional 30 to include the entire profit of 50 made by subsidiary

Subsidiary (prior to payment of dividend

Assets 100
Liabilities 50
Retained earnings 50

Subsidiary (post payment)
Assets 80
Liabilities 50
Retained earnings 30