The treatment of dividends,paid by a subsidiary,that are identified as paid out of pre-acquisition profits in the period they are paid is to:
A) Capitalise the dividend in the books of the parent entity as a further investment in the subsidiary. This amount will be eliminated on consolidation.
B) Record dividend revenue and the receipt of cash in the books of the parent entity and then eliminate the transaction on consolidation.
C) Record a return of the investment in the subsidiary by decreasing the investment in the subsidiary in the books of the parent entity. The amount of the investment will be eliminated on consolidation.
D) Record a decrease in pre-acquisition reserves or retained profits in the books of the subsidiary so that on consolidation the elimination entry will automatically eliminate the effect of the dividend.
E) None of the given answers.

Question

Quizplus · Accepted Answer

Dividends paid out of pre-acquisition profits are considered a return of investment, thus reducing the investment in the subsidiary in the parent's books. This is then eliminated on consolidation.

The Treatment of Dividends,paid by a Subsidiary,that Are Identified as Paid