Question

22. Little Company declared a dividend of $90 000 for the period ended 30 June 2014. Big
Company owns 100% of the equity of Little Company. Big Company accrues
dividends when they are declared by its subsidiaries. What elimination entry
would be required to prepare the consolidated financial statements for the
group for the period ended 30 June 2014?

25. Stormy Ltd has purchased all the issued capital of Cloud Ltd at the beginning of the
current period. At the end of the period Cloud Ltd declares a dividend of $50
000 that is identified as being paid out of pre-acquisition profits. What
entries would Stormy Ltd and Cloud Ltd make in their own books? (Assume Stormy
Ltd accrues the dividends of subsidiaries when they are declared.)

Answer 1

1.Elimination Entry for dividend declared.

Elimination entries are made for removing the effects of inter company transactions. Entry required to prepare the consolidation statement as on 30 June 2014 are as follows,

a. When the Dividend is declared,

Retained Earnings a/c   dr $90,000

Dividend Payable  a/c cr $90000

( For declaration of dividends)

b.For Eliminating dividend declared and dividend payable

. Dividend Revenue a/c dr $90000

Dividend Declared  a/c cr $90000

( For eliminating dividend declared)

. Dividend payable a/c   dr $90000

Dividend receivable a/c cr $90000

( For eliminating dividend payable)

Note.

If ex-dividend, ignore dividend payable adjustment.

2.Dividend paid out of pre-acquisition profits

Any dividend paid out of pre-acquisition profits after the acquisition will effectively be a return on capital to the parent and therefore will reduce the cost of investment with the dividend amount.

a. Entry in the books of Stormy Ltd(parent company)

Bank/Cash A/c dr $50000

Shares in Cloud Ltd cr $50000

( dividend paid out of pre-acquisition profits)

b.Entry in the books of Cloud Ltd(subsidiary company)

Shares in Stormy Ltd a/c dr $50000

Bank/cash a/c cr $50000

( dividend paid to parent company)