Question

What effect does subsidiary stock dividends on elimination procedures?

Answer 1

When the subsidiary pays a dividend, the parent company reduces its investment in the subsidiary by the dividend amount when it is paid out of the pre acquisition profits and the parent company transfers the dividend to the Profit& Loss Account when it is out of post acquisition profits. In preparing consolidated financial statements, parent companies eliminate the effects of intercompany transactions by making elimination entries and dividend paid by the subsidiary company is one of the inter company transaction which needs to be eliminated at the time of consolidation.

If a stock dividend is paid by the subsidiary company, then the same amount should be reduced from the investment value in the books of parent company. Because, Stock dividends are mostly paid out of pre acquisition profits. At the time of consolidation, the same should be eliminated. The entry will be as follows:

Common Stock A/c Dr

To Investment in Subsidiary A/c