Consolidations: Ch 4 - General Intragroup Transactions Flashcards
What account(s) must the group debit and credit in the two journal consolidation journal entries when dividends is declared by a subsidiary that is wholly owned by the parent company?
DR DIVIDEND INCOME (PARENT) (P/L) - Operating income
Cr dividends declared (sub) (SCE) - Equity
DR SHAREHOLDERS FOR DIVIDENDS (SUB) (SFP) - Liability
Cr dividends receivable (parent) (SFP) - Asset
In the elimination journal entry for a partially-owned subsidiary that has declared dividends, the NCI line item is debited. Why?
NCI is presented as part of the “total equity” in the consolidated SFP, therefore it has a credit balance and it represents the NCI’s @ acquisition amount and since acquisition equity movement amount. This means that if the sub.’s RE decreased due to dividend payment so would the sub.’s total equity.
What is the elimination journal entry for the declared dividend due to the NCI?
Dividend due to NCI represents an amount due to outside parties and, therefore doesn’t need to be eliminated
What are the debit and credit line items of the second elimination journal entry when dividends of a partially-owned subsidiary has been declared AND paid? Why does the group make this entry?
Trick Question
There is no second journal entry when dividends has been declared AND paid and therefore they’ll be no “Shareholders for dividends (Sub)” or “Dividends receivable (Parent)” line items.
What are the two important questions one must ask one’s self when deciding whether the NCI should be adjusted or not in a intragroup transaction?
1) Does the consolidation journal have a NET effect on the group’s profit? (i.e. Will the groups profit be the same before and after the consolidation journal is accounted for?)
2) If the group’s profit IS effected, which group entity in the SPLOCI is debited and which one is credited?
If only the parents profit increases, will the NCI’s profit increase?
No, NCI only arises when there is a group situation and consolidation occurs, therefore, the NCI’s profit increases only when the whole groups’ profits increase
How does each party (subsidiary/parent/NCI) get effected if the subsidiary rents a building to the parent?
- Subsidiary receives rent income
- Parent pays rent expense attributable to Sub. and NCI, separately
- NCI receives their predetermined portion of rent income
How does the consolidated financial statement treat an intragroup loan transaction that has been partly settled?
The loan amounts in the separate financial statements of the parent and subsidiary are merely netted off using a consolidation journal in the following year.
Why do consolidated financial statements only disclose the closing balances with regards to loans due and loans granted?
A consolidated journal entry is used to net of the part of the loan due and loan granted amounts that have been settled, resulting in there being no reconciliation between the opening and closing balances
If one party within a group has a negative bank balance (bank overdraft) and the other party has a positive bank balance, what are the criteria that must be met in order to net the amounts in the consolidated financial statements?
1) both entities’ bank accounts should be kept at the SAME INSTITUTION
2) There must be an AGREEMENT IN PLACE stating that the two accounts may be set off against each other
3) the group must intend to SETTLE the account SIMULTANEOUSLY (net basis)
Intragroup rent is applied in one scenario within the scope of this work. What is that scenario?
Where the rental agreement between group parties is a lease agreement and the lessor has classified the agreement as an operating lease, while the lessee has elected to apply the recognition criteria i.t.o. the qualifying asset.
What would happen if the dividend declared by the subsidiary during the current year EXCEEDED the profit for the year as well as the since acquisition retained earnings?
This is a pre-acquisition dividend as the dividend is declared out retained earnings that accumulated before acquisition.
In SUBSIDIARY’S F/S: the TOTAL available retained earnings amount (generated before or since acquisition, doesn’t matter) may be declared a dividend.
In PARENTS F/S: Dividend income received is the subsidiary’s TOTAL retained earnings apportioned by parent’s PROPORTIONATE SHARE in subsidiary. The other share goes to the NCI.
