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cpa_ca
Newbie
Newbie

Joined: 19 Mar 2009
Online Status: Offline
Posts: 40

Posted: 23 Aug 2012 at 00:53 \| IP Logged

Hi All,

I got two problems but the answers are not consistent.

1. Jane Co. owns 90% of the common stock of Dun Corp. and
100% of the common stock of Beech Corp. On Dec. 30, Dun
and Beech each declared a cash dividend of $100,000 for
the current year. What is the total amount of dividends
that should be reported in the Dec. 31 consolidated
financial statements of Jane and its subsidiaries, Dun
and Beech?
a. $10,000
b. $100,000
c. $190,000
d. $200,000

The answer is "a". 10% of the dividend from Dun is not
eliminated.

However, in the following problem:

Pride, Inc. owns 80% of Simba, Inc.'s outstanding common
stock. Simba, in turn, owns 10% of Pride's outstanding
common stock. What percentage of the common stock cash
dividends declared by the individual companies should be
reported as dividends declared in the consolidated
financial statements?

     by Pride         & nbsp; by Simba
a.      90%   & nbsp;         & nbsp;   0%
b.      90%   & nbsp;         & nbsp;   20%
c.      100%                   0%
d.      100%               20%

The answer is "a". Note that this is inconsistent with
the first problem, which eliminates 90% of the dividends
by subsidiary but here 100% of the dividends are
eliminated.

My question is: which one is correct and where my
understanding got wrong? Thank you very much!

FARleft
Contributor

Joined: 27 Sep 2010
Location: United States
Online Status: Offline
Posts: 60

Posted: 23 Aug 2012 at 17:48 \| IP Logged

cpa_ca

The two questions are very different. However, question 2 is unique so to understand the solution start with the second sentence of #2. In question 1 there is over 50% ownership, therefore we can consolidate and eliminate except for the 10% not owned by Jane. Jane owns 90% of Dun, therefore Jane must consolidate her 90% ownership and 100% ownership.

Question two says Simba owns 10% of Pride while Pride owns 80% of Simba. So somebody else owns the other 90% of pride. 10 % minority has no influence or ownership so we can not consolidation, it is less than 50%. But Pride owns 80% Simba so consolidation is done.

Is that better?

cpa_ca
Newbie
Newbie

Joined: 19 Mar 2009
Online Status: Offline
Posts: 40

Posted: 24 Aug 2012 at 12:24 \| IP Logged

But I still don't understand question 2. Pride only owns 80% of Simba, why
100% of Simba's dividends are eliminated? If we follow the same idea as
question 1, only 80% dividends by Simba should be eliminated. Right?

Thanks for your help!

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