Consolidating balance sheet after acquisition

An intercompany dividend out of pre-acquisition income does transfer cash from the subsidiary to the parent but otherwise has no real effect.Problems in the consolidation of group accounts Two major problems arise on the consolidation of group accounts:(a) P Ltd bought the investment in S Ltd for exactly the same amount as the net assets involved, £40 m.Just to cross add the debtors and creditors of both companies would lead to an overstatement of the figures for current assets and current liabilities in the group balance sheet.True enough, S does owe P £2000, but the group position is that the £2000 is an internal or inter-company loan and is neither an external asset nor liability of the group.Consolidating group income At the end of the year the income of both companies results in a corresponding increase in their net assets.The income of a subsidiary made after acquisition is regarded as distributable from the group point of view and is combined with the income of the parent to show the group income on the consolidated balance sheet. The entries required are those normally required for recording the declaration and payment of a dividend.

The treatment of dividends Dividends may be paid either by the parent company, or the subsidiary, or by both companies. Dividend paid by Subsidiary Ltd If S Ltd declares a dividend it will be paid to its sole shareholder-P Ltd.However, when reporting financial information, the parent company is required to submit financial statements that combine their information with that of their subsidiaries.These documents are called consolidated financial statements and allow the health of the group to be assessed as a whole, rather than piece-by-piece.In practice, it is rare for a dividend to be paid from pre-acquisition income, but where a dividend is paid which is larger than post-acquisition income, a LIFO rule is applied, that is, the most recent income is deemed to have been paid out, and only the excess is assumed to have been paid out of capitalized pre-acquisition income.The consolidated balance sheet is the same as that in Example 2.

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