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CONSOLIDATED ACCOUNT:
Income From Subsidiary &Bonus Issue
Chapter 10
FRS 3 &127
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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
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Income From Subsidiary
Interest
Dividend
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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.
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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
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INTEREST/DIVIDEND
both the subsidiary and holding have recorded the interest/dividend
Illustration 1 page 442
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
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INTEREST/DIVIDEND
both the subsidiary and holding have recorded the interest/dividend
Illustration 1 page 442
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
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Example 1: page 443
Discuss in class
Intra group:
Debentures Debenture interest
Preference dividends
Ordinary dividends
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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%)
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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%)
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INTEREST/DIVIDEND
both the subsidiary and holding have not recorded the interest/dividendyet
Do the recording in the both books (H and S)
Illustration 2 page 446
Same fact as illustration 1 except both company have not recordedyet
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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
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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
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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
ct Profit and loss of H 4,000
Interest payable of S 6,000
Dividend
dt Profit and loss of S 20,000
ct Profit and loss of H 15,000
Dividend payable of S 5,000
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INTEREST/DIVIDEND
Consolidation adjustment Suppose disclosed in the Balance Sheet as
By S → Interest payable = RM10,000
Dividend payable = RM20,000
By H → Interest receivable = RM4,000
Dividend receivable = RM15,000
But the Rule is to eliminate intra group transaction.
So Balance Sheet will appear asBy S → Interest payable = RM6,000
Dividend payable = RM5,000
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Example 2: Page 448
Discussion in class
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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
Illustration 3 page 451
Same fact as illustration 1 except H had not recorded yet
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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
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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
By H → Interest receivable = RM4,000
Dividend receivable = RM15,000
Rule is to eliminate intra group transaction.
So Balance Sheet will appear asBy S → Interest payable = RM6,000
Dividend payable = RM5,000
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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
ct Profit and loss of H 15,000
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Example 3: Page 452
Discussion in class
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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.
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INTEREST/DIVIDENDS:OUT OF PRE ACQUISITION PROFIT
Illustration 4 page 456
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)
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INTEREST/DIVIDENDS:OUT OF PRE ACQUISITION PROFIT
Dividend
All dividends (pre or post) declared and paid bythe subsidiary are considered as income.
Credit Profit and loss of H
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INTEREST/DIVIDENDS:OUT OF PRE ACQUISITION PROFIT
Illustration 5 page 456
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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
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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
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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