income from subsidiary

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CONSOLIDATED ACCOUNT:

Income From Subsidiary &Bonus Issue

Chapter 10

FRS 3 &127



Learning outcome

At the end of this topic, students will be able to:

Explain the concept of a subsidiary and the

principles of how they are accounted for



Income From Subsidiary

Interest

Dividend



INTEREST/DIVIDEND

3 different situations:

both the subsidiary and holding have recorded theinterest/dividend

the subsidiary and holding have not recorded theinterest/dividend yet

the subsidiary has recorded the interest/dividendpayable but the holding company has not taken credit for

its share of interest/dividend receivable.



INTEREST/DIVIDEND

both the subsidiary and holding have recorded the interest/dividend

Illustration 1 page 442

Dividend

H acquire 300/400 = 75% control of Ord Share of S

Dividend declared by S = RM20,000

Dividend receivable by H = 75% x RM20,000 = RM15,000

Already being recorded by both company → record/balance can beseen in the Statement of Financial Position



INTEREST/DIVIDEND



Interest

10% debenture of S, RM100,000

interest = 10% x 100,000 = RM10,000

H acquire RM40,000 of S debenture = 40%Interest receivable by H = 4,000

Already being recorded by both company → record/balance can be

seen in the Statement of Financial Position



INTEREST/DIVIDEND



Disclosed in the Balance SheetBy S → Interest payable = RM10,000

By H → Interest receivable = RM4,000

Consolidation Adjustment

Intra group transaction will be eliminatedBy S → Interest payable = RM10,000 RM6,000

By H → Interest receivable = RM4,000 0



Example 1: page 443

Discuss in class

Intra group:

Debentures Debenture interest

Preference dividends

Ordinary dividends



Example 1: page 443

Discuss in class

Intra group:

Debentures

Debenture of S: RM100,000 H = RM40,000 (40%)

Others = RM60,000 (60%)

Debenture interest

Payable by S: RM5,000 H = RM2,000 (40%)

Others = RM3,000 (60%)



Example 1: page 443

Discuss in class

Intra group:

Preference dividend

Payable by S: RM1,750 H = RM700 (40%)

NCI = RM1,050 (60%)

Ordinary dividend

Payable by S: RM7,000 H = RM5,250 (75%)

NCI = RM1,750 (25%)



INTEREST/DIVIDEND

both the subsidiary and holding have not recorded the interest/dividendyet

Do the recording in the both books (H and S)


Same fact as illustration 1 except both company have not recordedyet



INTEREST/DIVIDEND

Book of S Accrue for the interest and dividends:

Journal entries

dt Profit & loss of S 10,000ct Interest payable of S 10,000

dt Profit & loss of S 20,000

ct Dividend payable of S 20,000



INTEREST/DIVIDEND

Book of H Recognise the income receivable from subsidiary

Journal entries

dt Interest receivable 4,000ct Profit and loss of H 4,000

dt Dividend receivable 15,000

ct Profit and loss of H 15,000



INTEREST/DIVIDEND

Consolidation adjustment Intra group balances of interest receivable and interest payable are

cancelled off.

Short cut:

Interest

dt Profit and loss of S 10,000


Interest payable of S 6,000

Dividend

dt Profit and loss of S 20,000


Dividend payable of S 5,000



INTEREST/DIVIDEND

Consolidation adjustment Suppose disclosed in the Balance Sheet as

By S → Interest payable = RM10,000

Dividend payable = RM20,000


Dividend receivable = RM15,000

But the Rule is to eliminate intra group transaction.

So Balance Sheet will appear asBy S → Interest payable = RM6,000




Example 2: Page 448

Discussion in class



INTEREST/DIVIDEND

the subsidiary has recorded the interest payable but the holdingcompany has not taken credit for its share of interest receivable.

Do the recording in the book of H


Same fact as illustration 1 except H had not recorded yet



INTEREST/DIVIDEND

Book of H Recognise the income receivable from subsidiary

Journal entries

dt Interest receivable 4,000ct Profit and loss of H 4,000

dt Dividend receivable 15,000




INTEREST/DIVIDEND

Consolidation adjustment disclosed in the Balance Sheet as

By S → Interest payable = RM10,000 Shown in the pre adjustment

Dividend payable = RM20,000 financial statement of S


Dividend receivable = RM15,000

Rule is to eliminate intra group transaction.

So Balance Sheet will appear asBy S → Interest payable = RM6,000




INTEREST/DIVIDEND

Consolidation adjustment Short cut:

Interest

dt Interest payable of S 4,000ct Profit and loss of H 4,000

Dividend

dt Dividend payable of S 15,000




Example 3: Page 452

Discussion in class



INTEREST/DIVIDENDS:OUT OF PRE ACQUISITION PROFIT

Interest

Acquired cum dividend are priced higher → as

next dividend or interest is imputed into the

price.

Interest (pre acquisition) received deducted fromthe cost → not taken as income.





1 April x2 bought 10% loan stock for RM102,500 whichincludes 3 months interest.

1 July x2 received ½ year interest RM5,000 RM2,500 will be deducted from the cost (pre acq: Jan – March x2)

RM2,500 recognised as income (post acq: Apr – June x2)




Dividend

All dividends (pre or post) declared and paid bythe subsidiary are considered as income.

Credit Profit and loss of H



Acq during the year:Dividend paid during the year

Dividends paid before aquire: Parent wouldnot have received the dividend

Dividends paid after acquire: paid out of postprofit.

Example 4 page 457



Bonus Shares issued by Subsidiary

Consolidation treatment of the bonusdepends on the reserve utilised:

Pre acquisition reserve : Illustration 6 page 460

Post acquisition reserve: Illustration 7 page 461



Tutorial Question

10.4 and 10.6

Due date:

Group 3A: 6 Oct 2011 at 10.00am

Group 3B: 7 Oct 2011 at 10.00am

income from subsidiary

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