Flagstone Limited acquired 100% of the shares in Pebbles Limited on a cum div. basis for $700 000. At acquisition date, the Pebbles Limited had a declared dividend of $80 000. The pre-acquisition entry must include the following line:
A) Dr Shares in subsidiary $620 000
B) Cr Shares in subsidiary $620 000
C) Cr Shares in subsidiary $80 000
D) Cr Shares in subsidiary $780 000

Question

Quizplus · Accepted Answer

The pre-acquisition entry should include the cost of acquisition which is $700 000 and the dividend declared by Pebbles Limited, which is $80 000. Thus, the entry should be: 
Dr Investment in subsidiary $700 000
Cr Cash $700 000
Cr Dividend income $80 000 (to record the dividend received from the subsidiary) 
Cr Shares in subsidiary $620 000 (to eliminate the share capital of Pebbles Limited)

Flagstone Limited Acquired 100% of the Shares in Pebbles Limited