Intercompany Dividends

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  • #172999
    Anonymous
    Inactive

    Hi, I was hoping someone could help me with this question. I understand how they got the answer and their logic behind it. However, I thought when you consolidate, dividends of the subsidiary, which would be part of retained earnings, gets eliminated entirely because we only report the parent’s retained earnings in the consolidated balance sheet. Then, any portion of dividends that is attributable to the non-controlling interest would reduced their balance. However, no dividends paid by the subsidiary are actually reported on the balance sheet right? Why is the answer $10,000 then?

    Question CPA-06919

    Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech?

    a. $10,000 b. $100,000 c. $190,000 d. $200,000

    Explanation

    Choice “a” is correct. Since Jane owns 90% of Dun and 100% of Beech, when they declare and pay dividends, the only amounts that should appear in their year-end consolidated financial statements are the dividends paid to outsiders or external parties. Intercompany dividends should be eliminated upon consolidation. In this case, the only non- controlling interest that exists is the 10% of Dun that Jane does not own. So all 100% of Beech’s $100,000 dividend would be eliminated, but only 90% of Dun’s $100,000 would be eliminated. Therefore, just 10% of Dun’s $100,000 dividend, or $10,000, will appear in Jane and subs’ year-end consolidated financial statements.

Viewing 8 replies - 1 through 8 (of 8 total)
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  • #596682
    Isaac
    Participant

    This is a great question. I too thought inter-company dividends were eliminated when you own more than 80%.

    FAR...80...Yaeger...Nov/2011
    AUD...Exam...Oct/2012
    REG
    BEC

    #596683
    tracewave
    Member

    I am stuck on this as well. I have ample indication from other questions that, even if a subsidiary is not 100% fully owned, all 100% of their dividends are eliminated in the consolidated process, thus leaving only the parent's dividends as the consolidated total reported in the consolidated financial statements. Dividends paid to the non-controlling interest should lower the balance of the non-controlling interest equity account.

    AUD 97

    #596684
    leglock
    Participant

    Im assuming u r a becker customer like i was. If so can u post the becker question number bc i recall having the exact same question as u when i took far a year ago and believe i received an extremely detailed answer that i can look for and post here

    Lastly i believe for tax u consolidate with 80 percent owneeship but for gaap u consolidate when u have control which is assumed at greater than 50 percent not 80 percent

    #596685
    leglock
    Participant

    Ok, i found the answer given by someone who is supremely knowledgeable (mba, cpa, cfa ) . Basically he does not like the answer to this question and references other questions he feels are more appropriate What he wrote is as follows:

    Comments

    In this question, the intercompany dividends paid by the 100% owned sub are completely eliminated. That is almost certainly correct since the dividends are totally intercompany. This is like the dividends paid by the sub in CPA-00432.

    According to the solution, the intercompany dividends paid by the 90% owned sub are partially eliminated. The $90,000 dividends paid to the controlling interest (the parent) are eliminated. The $10,000 dividends paid to non-controlling interest are not eliminated. But that does not seem consistent with CPA-00432.

    I did not like this question when I originally saw it, I personally think that CPA-00432 and CPA-05920 are correct and think that CPA-06919 is a little bit off. If $0 had been an answer, I would have picked it. $0 is not available, so $10,000 is the next best answer.

    I think that the difference MAY BE the way the questions are worded. In CPA-00432 and CPA-05920, the question specifies the consolidated statement of retained earnings specifically. In CPA-06919, the question is asking about the consolidated financial statements in total. It seems like a very small difference, but I think it is significant. The $10,000 is not eliminated; it shows up as a part of the NCI, so, from that standpoint, it is reported in the consolidated financial statements.

    #596686
    tracewave
    Member

    Thanks so much for getting back to me. The becker people are telling me that:

    This fact pattern does not ask for the amount to be reported as dividends paid in their statement of retained earnings. Instead, note that this fact pattern asks for the amount to be reported within the consolidated financial statements. This is why just the 10%, or $10,000, will appear.

    I'm unsure about the difference between 1) the amount to be reported as dividends paid in the consolidated statement of retained earnings and 2) the amount of dividends to be reported within the consolidated financial statements?

    I know the $10,000 paid to outsiders will reduce the balance in the NCI, so in that sense, they exist in the consolidated financial statements…But…where exactly are these dividends paid by sub to the NCI being reported in the consolidated financial statements if they not in the dividends paid section of the consolidated statement of retained earning?

    Thanks again for getting back to me, I feel like I'm wasting a lot of time on this question and I should probably just stop worrying about it and move on.

    AUD 97

    #596687
    M.O.D.
    Member

    My advanced accounting textbook shows dividends paid to an NCI as part of the statement of changes in owners equity.

    Since the NCI percentage is not separated in the consolidated statements until the very end, the consolidated company must account for and calculate NCI's equity in all statements.

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

    #596688
    tracewave
    Member

    Follow up from Becker:

    “There really is no difference between the dividends reported within a consolidated statement of RE versus the consolidated financial statements. The real difference between 432 (another question eliminating all of a partially owned sub's dividends) and 6919 is that in 432 one company owns another whereas in 6919, one company owns two others, and hence the different treatment in the dividends reported in the FS. The way you learned to do this in advanced accounting applies. 100% of a sub's dividends are eliminated during the consolidation process, and yes, dividends reduces the NCI.”

    Does this make sense to anyone? One the one hand, 100% of the dividends are eliminated in the consolidation process….BUT…since the parent owns two companies, 10% are not eliminated. I dunno…….but I'm about done with this question.

    Could the NCI Dividends only be shown in calculation section of a changes in owner's equity but not reported as “dividends” in the statement of retained earnings or cash flows?

    AUD 97

    #596689
    M.O.D.
    Member

    There are two columns in the RE statement, one for the consolidated company, and one for the NCI.

    Keep in mind that the consolidated company acts as a fiduciary for the NCI, so even if it does not ultimately pay itself any dividends, due to the joint ownership, it has to pay the NCI, and it has to report to the public (including the NCI) its accounts.

    Therefore the NCI accounts are part of any consolidated statements.

    You should try some T-accounts with the NCI as a liability of the combined entity (and a deduction from the entire equity). Or alternatively close the books 90% to company equity and 10% to NCI. (Then reconstitute the 90% as 100-10% for reporting purposes)

    To me it makes sense because I can follow the T-accounts.

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

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