Question

1. Explain the difference between ex div and cu m div acquisitions - the effects on the acquisition journal entry in the records of the parent under each circumstance

Answer 1

Under Ex-dividend purchase of Shares, the purchaser is NOT entitled to dividend on shares, which has been recently declared. This happens when shares are being purchased after the Record date

Under Cu m- dividend purchase of shares, the purchasers is entitled to receive dividend on shares, which has been recently declared. This happens when shares are being purchased before the closure of Record date

Between the time of declaration of dividend and record rate, the share price generally goes up to the extent of dividend per share declared and after the record date, the share price declined to that extent.

The effect on journal entries on purchase of cu m dividend share is being explained with example

Suppose cu m-dividend share price is 100, dividend declared and received per share is 2.

On purchase of 1 share

Investment A/c – Dr       100

To Bank A/C                                      100

(Being investment made in share, the price being cu m-dividend)

On receipt of Dividend

Bank A/C – Dr                    2

To Investment A/c                        2

(Being dividend received on investment and same is reduced from investment as the price was cu m-dividend)

Thus, the cu m-dividend price includes the amount of dividend in investment and investment amount is reduced to the extent of dividend received.