Question

Viking Inc. owned all of Quest Co. The subsidiary had bonds payable outstanding on January 1, 2016, with a book value of $265K. The parent acquired the bonds on that date for $288K. Subsequently, Viking reported interest income of $25K in 2016 while Quest reported interest expense of $29K. Consolidated financial statements were prepared for 2017. What adjustment would be required for the retained earnings balance as of January 1, 2017?

Answer 1

As per International accounting standard 10- (IAS-10)- If the subsidiary company has declared a dividend before the year-end, this will appear in the current liabilities of the subsidiary company and in the current assets of the parent company and must be cancelled before preparing the consolidated statement of financial position. If the subsidiary is wholly owned by the parent the whole amount will be cancelled. If, however, there is a non-controlling interest in the subsidiary, the non-cancelled amount of the dividend payable in the subsidiary’s statement of financial position will be the amount payable to the non-controlling interest and will be reported as part of the non-controlling interest in the consolidated statement of financial position.

Adjustment in consolidation Retained Earnings

Beginning Consolidated Retained Earnings                                        

            Plus: Consolidated Net Income                                                 

            Less: Dividends Declared by VIKING LTD                                 

            Ending Consolidated Retained Earnings

Entries in the books of Parent Company- VIKING LTD

(1)	Investment in Quest Company	288
	Cash		288

                          To record purchase of Bonds.

(2)	Cash	25
	Investment in Quest Company		25

                           To record dividends received

           

But as VIKING Ltd has wholly owned Quest Ltd so Intercompany interest income is eliminated and any effect on the retained earnings of Company Viking are eliminated.