Dividends from Subsidiary Company

In this article we will discuss about the Dividend from Subsidiary Company Pre-acquisition and Post Acquisition Profits along with Solved Illustrations.

Dividend received by the holding company from its subsidiary out of pre-acquisition profits is treated as capital receipt; the journal entry for its record being as follows:—


Dividend received from the subsidiary company out of pre-acquisition profits.

Its effect on the holding company’s balance sheet is as follows;—

Thus the holding company deducts the amount of dividend received out of pre-acquisition profits from the balance of shares in subsidiary company account.

But it does not alter the amount of cost of control or capital reserve arising out of acquisition of shares; the reason being that although the cost of investment in the subsidiary company is reduced, the holding company’s share in the capital profits is also reduced by an identical amount.

Dividend from Subsidiary Company out of Post-acquisition Profits:

Dividend received out of post acquisition profits is treated as a revenue receipt; the journal entries regarding it being as follows:—


Because such a dividend does not change the cost of shares of the subsidiary company and the holding company’s share of capital profits, it will also not alter the cost of control or capital reserve on acquisition of shares.

Rectification of Error Relating to Dividend from Subsidiary Company:

In a question on consolidation of balance sheets, it may be given that the holding company has received dividend from the subsidiary company out of pre-acquisition profits and has credited its Profit & Loss Account with the amount so received. It means an error has been committed in as much as a capital receipt has been treated as an income.

The correct journal entry for receipt of dividend out of pre-acquisition profits is as follows:—


Illustration 1:

H Ltd. acquired 12,000 shares of S Ltd. for Rs 1,70,000 on April 1,2011 on which date S Ltd’s Profit & Loss Account showed a credit balance of Rs 53,400. In August, 2011 S Ltd. declared a dividend of 10% for the year ended 31st March, 2011. This dividend was credited by H Ltd. to its Profit &. Loss Account. Assume dividend distribution tax was paid 17%.

On 31st March, 2012 the balance sheets of the two companies appeared as follows:—





Interim Dividend from the Subsidiary Company:

The holding company may receive interim dividend from the subsidiary company; if such an interim dividend is to be apportioned between pre-acquisition period and post acquisition period, it should be assumed that the interim dividend has been earned evenly throughout the year.

Illustration 2:

H Ltd. acquired 80% shares in S Ltd. on 30th September, 2011 at a total cost of Rs 3,60,000.

The balance sheets at 31st March, 2012 when the accounts of both the companies were prepared were as under:—





Proposed Dividend:

On the liabilities side of the balance sheet of the subsidiary company, proposed dividend may appear. Unless the facts of the case point otherwise, it should be assumed that proposed dividend is out of post acquisition profits. Hence, holding company’s share of proposed dividend will be added to the holding company’s Profit and Loss Account whereas minority shareholders’ share will be added to minority interest.

Illustration 3:

On 1st April, 2011 H Ltd. acquired 70% shares in S Ltd. for Rs 3,40,000. S Ltd.’s General Reserve and Profit and Loss Account on that date showed balances of Rs 80,000 and Rs 50,000 respectively. On 10th July, 2011 S Ltd. declared the final dividend of 10% per annum for the year ended 31st March, 2011.

On 10th January, 2012 it declared an interim dividend 8% per annum for full year. H Ltd. credited the final dividend of 10% as well as interim dividend of 8% to its Profit and Loss Account. Ignore dividend distribution tax.

On 31 St March, 2012 the balance sheets of the two companies stood as follows:—






Illustration 4:

H Ltd. acquired 90 per cent of the equity shares in S Ltd. on September 30, 2011 at a cost of Rs. 6,00,000. No balance sheet was prepared on the date of acquisition. The balance sheets of S Ltd. as at 31st March, 2011 and 31st March, 2012 were as follows:





Illustration 5:

H Ltd. acquired 80 per cent of both classes of shares in S Ltd. as on 1st April, 2011 at a total cost of Rs. 5,60,000. The balance sheets of both the companies as at 31st March, 2012 were as follows:





Treatment of Depreciation in Respect of a Change in the Value of a Fixed Asset of the Subsidiary:

If the value of a fixed asset of the subsidiary company is changed with retrospective effect after depreciation has been provided for full year, depreciation in respect of increase or decrease in the value of the fixed asset has to be adjusted as a revenue profit or loss.

Illustration 6:

H Ltd. acquired 30,000 equity shares in S Ltd. on 1st October, 2011. On 31st March, 2012 the balance sheet of S Ltd. stood as follows:




Illustration 7:

The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as at 31st March, 2012:



Illustration 8:

The following are the balance sheets of Sun Ltd. and Moon Ltd. as on 31st March, 2012:





Illustration 9:

From the following balance sheets of H Ltd. and its subsidiary S Ltd. and the additional information given thereafter, prepare consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2012:

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Additional information:

(i) On 1st April, 2011 S Ltd.’s General Reserve and Profit and Loss Account showed balances of Rs 1,30,000 and Rs 1,26,000 respectively.

(ii) In October, 2011 S Ltd. declared and paid full year’s preference dividend and equity dividend % for the year ended 31st March, 2011. It also paid Corporate Dividend Tax %. H Ltd. credited the dividend received by it to its Profit and Loss Account.

(iii) Included in Creditors of S Ltd. is a sum of Rs 30,000 for goods supplied by H Ltd. On 31st March, 2010 half of these goods were lying unsold in S Ltd. ‘s godown. H Ltd. charged profit 25% on cost.

(iv) S Ltd. has a contingent liability of Rs 2,500 in a suit pending in a court of law.




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