[Anonymous]

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend has on retained earnings and non-controlling interest balances in the parent’s company consolidated balance sheet?

Answer: No effect on retained earnings and a decrease in non-controlling interest.

I understand the decrease in non-controlling interest part, but I don’t quite understand why it has no effect on the parent’s retained earnings. Please explain to me why I am wrong.

I know that when you consolidate the sub, you remove the the sub stockholder equity. However, I thought when the sub pays out dividend, it reduces the share of earning in the parent’s company income statement, and in turn reduces net income and as a result reduces retain earnings in the parent’s company balance sheet?? I’m confused. Please help.

[Faintear]

If I am correct here… It's because the Consolidated B/S will eliminate any intercompany transactions. In this case, the dividend between Sub and Parent will be eliminated meaning no change in Retained Earnings.

[subie_rex]

If a parent company owns a controlling share in a subsidiary (greater than 50% of the outstanding common stock) then they generally account for the investment on their books using the equity method (which can either be basic equity or full equity).

A dividend paid by the subsidiary to the parent does not effect net income. The equity method treats this as a reduction in the investment in the subsidiary. You can think of it as a withdraw from a bank account due to the sub being majority owned by the parent. Thus, the journal entry looks as follows:

Cash (or dividends receivable) xxxx

Investment in sub xxxx

This means the dividend does not flow through the parent's income and thus will not reduce it's retained earnings. Furthermore, any dividends paid by the sub to the parent will be eliminated. Only the parent's dividends paid will remain.

I hope this helps.

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[Anonymous]

Let's use the above example:

The Sub earned $100 this year and paid out $10 dividend.

If the Sub beginning retained earnings is $0, at year end it's $90.

Beginning retained earnings = $0 +$100 income – 10 dividend paid out = $90

Since the parent owns 100% of the sub, the parent will recognize 100% of the income, which is $90 ($100 in income from sub – $10 from dividend). As the result, if the parent beginning retained earnings is zero, their year end retained earnings would be $90 instead of $100 (if no dividend paid), which is a decrease??

The dividend the parent received account under equity method as:

D: Cash

C: Investment in Sub.

[Anonymous]

Let's use the above example:

The Sub earned $100 this year and paid out $10 dividend.

If the Sub beginning retained earnings is $0, at year end it's $90.

Beginning retained earnings = $0 +$100 income – 10 dividend paid out = $90

Since the parent owns 100% of the sub, the parent will recognize 100% of the income, which is $90 ($100 in income from sub – $10 from dividend). As the result, if the parent beginning retained earnings is zero, their year end retained earnings would be $90 instead of $100 (if no dividend paid), which is a decrease??

The dividend the parent received account under equity method as:

D: Cash

C: Investment in Sub.

[Tobias-Germany]

Well, I suppose another much more simpler explanation:

The parent owns 70% of the subsidiary, so only 30% of the dividends belong to the NCI. The NCI adjustments are just like a “bank-account”, earnings are credited and dividends are dedited like withdrawals (remember that the NCI account can have a debit balance at year-end, it's not unusually).

So your entry is just like the following:

DR: NCI (reducing NCI account in stockholder`s equity)

CR: Cash (30% of the dividens declared and paid to “externals”)

There is no impact in retained earnings, since the cash dividend to the NCI just reduces the NCI account

I hope it helps you with your studying 😉

Greetings from Germany

Tobias

[subie_rex]

Where in Germany are you? Are you military perchance?

BEC-86 (07/07/12)
FAR-87(08/25/12)
AUD-93(10/08/12)
REG-87(11/17/12)

[Author]

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