Question

Pop Corporation pays $176,000 for 80% of the outstanding voting stock of Son Corporation on Jan 1, 2016, when Son's stockholders' equity consists of $120,000 capital stock and $60,000 retained earnings. Son's net income and dividends were as follows:

	2016	2017
Net income	$50,000	$60,000
Dividends	30,000	30,000

How would dividends paid from the subsidiary be treated in the consolidated income statement ? Also, would dividends paid be recorded in Pop's Corporation's books? or only Son's books, at the entire amount ?

Answer 1

The student may note that the acquisition of 80% of Son corp. outstanding voting stock was made by Pop corp. on Jan 1, 2016. The dividends shown in the question are after Jan 1, 2016. This tells us that the dividend incomes shown are post acquisition incomes and that as far as Pop corp.(holding company) is concerned, it is revenue profit. Pre-acquisition profits are capitalized while post acquisition profits are recognized as revenue. Therefore the share of Pop corp. in the dividend paid by Son corp.: $24000(30000*80%) for 2016 and $24000(30000*80%) for 2017, will be recognized in the consolidated income statement.

Yes, the dividends will be recorded in Pop corp's books. The entry will be the following for both years in Pop's books.

Bank a/c. Dr. 24000

To Shares in Son corp. 24000

The payment of dividend to Pop corp. will be recorded in Son's books also as follows:

Pop corp. Dr. 24000

To Bank ac. 24000