Parent Ltd owns all the shares in Subsidiary Ltd on 1 June 2018. The dividends paid by Subsidiary Ltd for the financial year ending 30 June 2019 was $15,000 while the dividends paid by the subsidiary for the financial year ending 30 June 2020 was $12,000. What consolidation adjustment entry would be required at 30 June 2020?

Question

BlackTom AI · Accepted Answer

Question restatement: The scenario involves Parent Ltd owning all the shares of Subsidiary Ltd and receiving dividends from Subsidiary for the years ending 30 June 2019 ($15,000) and 30 June 2020 ($12,000). The task is to determine the consolidation adjustment entry required at 30 June 2020.

Option analysis:
- Provided option: Dr Dividend revenue $12,000, Cr Dividend paid $12,000.
  In a consolidation of a wholly owned subsidiary, any dividends paid by the subsidiary to the parent are intercompany profits that must be eliminated from the consolidated financial statements. The parent would have recorded dividend revenue (income) in its own books, while the subsidiary would have recorded a dividend payable (or reduction of retained earnings via dividends) in its books. To remove the double counting on consolidation, we debit (reduce) the parent’s dividend revenue by the amount of the intercompany dividend and credit (reduce) the subsidiary’s dividend payable by the same amount. Therefore, for the 12,000 dividend in the year ended 30 June 2020, the entry would be a Dr Dividend revenue 12,000 and a Cr Dividend paid 12,000. This aligns with the standard consolidation procedure for wholly owned subsidiaries where intercompany dividends are eliminated from the consolidation process.

Why other potential interpretations would be wrong (conceptual checks):
- If one suggested debiting an asset or equity account other than the dividend revenue (e.g., Dr Investment in Subsidiary or Dr Retained Earnings) without balancing the corresponding credit, the entry would not correctly neutralize the intercompany transaction in the consolidated statements.
- If the entry attempted to eliminate only the 2019 dividend or only the 2020 dividend without considering the time frame specified (30 June 2020) or without addressing both sides of the intercompany transaction, the consolidation would still show intercompany profit or dividend-related balances.
- If the entry did not include a corresponding credit to the intercompany dividend liability (Dividend paid), the subsidiary’s liability or reduction in retained earnings would not be properly removed from consolidation.

In summary, the required consolidation adjustment at 30 June 2020 to eliminate the intercompany dividend from Subsidiary Ltd to Parent Ltd is exactly the provided entry: Dr Dividend revenue $12,000, Cr Dividend paid $12,000, thereby removing the intercompany dividend effect from the consolidated financial statements.

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