A wholly-owned subsidiary declares and pays a cash dividend. What effect does the dividend have on...

A wholly-owned subsidiary declares and pays a cash dividend. What effect does the dividend have on the consolidated balance sheet?

A. Increases cash and decreases retained earnings.

B. No effect on cash and decreases retained earnings.

C. Decreases cash and decreases retained earnings.

D. No effect on the consolidated balance sheet.

Solutions

Expert Solution

Answer:

Option D (No effect on the consolidated balance sheet) is the correct answer.

Explanation:

The acquiree’s retained earnings year-end balance would be reported on the consolidated balance sheet. Though the declaration and payment of a dividend would result in the decrement in the retained earnings, there will no effect in the consolidated balance sheet.

Retained earnings reported on the consolidated balance sheet would equal the acquiree’s retained earnings balance at year-end. Thus, even though the declaration and payment of a dividend by the acquiree would decrease the acquiree’s retained earnings, there would be no effect on consolidated retained earnings.

The noncontrolling shares the fair value of the stock is termed as a noncontrolling interest. The balance would be increased by the percentage of noncontrolling interest in income and decreased by the percentage of interest’s share of the dividend of the acquiree. Therefore, the noncontrolling interest would be decreased. If the dividends are paid to the parent company by the subsidiary company, this would have no effect on the consolidated balance sheet.

ekkarill92 answered 1 month ago

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