The following points, in respect of dividends, should be kept in mind while preparing consolidated balance sheet:
(i) Proposed Dividend:
When a subsidiary company proposed the dividend, it debits its Profit and Loss Appropriation Account and credits Proposed Dividend Account. Holding Company’s share of such dividend will appear with the Profit and Loss Account balance in the consolidated Balance Sheet and the share of such dividend belonging to Minority Shareholders will be added to Minority Interest. Accordingly, proposed dividend need not appear in the consolidated Balance Sheet. This is because a portion is added to Profit and Loss Account balance of holding company and added the rest to the Minority Interest.
(ii) Payment of Dividend:
Where the holding company receives dividend from the subsidiary company, then its treatment in the holding company’s books and answer to the question whether such dividend shall be further available as dividend to the shareholders of the holding company will depend upon the following possibilities relating to the source from which such dividends have been paid: is as follows:
(a) If the whole of the dividend is from the pre-acquisition profits, it must be treated as capital gain and must be used either for reducing the cost of shares or for increasing capital reserve. The dividend so received is not available to the shareholders of the holding company and thus cannot be taken to the revenue profits of the holding company.
(b) If the whole of the dividend is received from the post-acquisition profits, it is again available to the shareholders of the holding company and can be credited to the Profit and Loss Account of the holding company.
(c) If dividend declared partly out of capital profits (Pre-acquisition profits) and partly out of revenue profits (post acquisition profits), the dividend received is divided into two parts in proportion to its declaration out of capital profits and revenue profits. The dividend pertaining to the first (capital profits) is credited to Investment Account reducing the cost of control or increasing the Capital Reserve and dividend pertaining to the second part (Revenue Profits) is credited to Profit and Loss Account.
Illustration (Mutual Owings):
The Profit and Loss Account of S Ltd. showed a credit balance of Rs 50,000 on 1st Jan 2004. A dividend of 15% was paid in October 2004 for the year 2003. This dividend was credited to the Profit and Loss Account by H Ltd. H Ltd. acquired the shares in S Ltd. on 1st July 2004. The Bills Payable of S Ltd. were all issued in favour of H Ltd. which company got the Bills discounted.
Following are the Balance Sheets of H Ltd. and S Ltd. as on 31st December 2004.
Included in the creditors of S Ltd. is Rs. 20,000 for goods supplied by H Ltd. Included in the stock of S Ltd. are goods to value of Rs 8,000 which were supplied by H Ltd. at a profit of 33 1/3% on cost. In arriving at the value of S Ltd. shares, the plant and machinery which then stood in the books at Rs 1, 00,000 was revalued at Rs 1, 50,000. The new value was not incorporated in the books. No changes in these have been made since the date.