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Pre-acquisition dividend

27 December 2017

In case a holding co purchase share on 01-01-2013 of Rs 1100000 when P/L as on 01-04-2012 was 240000 and date of payment of dividend by S ltd are

01-01-2012 Final 160000

01-10-2013 Final 176000

why is dividend paid of Rs 132000 (i.e 9 months till DOA) only deducted from investment ? why not 160000 too? Is Holding Co. liable for dividend of Rs 160000 to its portion (60% holding) ? If so what will be journal entry on receipt of such dividend ?

Please answer me

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satish (teaching) (2046 Points)
Replied 28 December 2017

suppose Mr X is the holder of these share since 2000.

1. dividend which is annouced by subsidiary company on 1-1-2012 Rs. 1,60,000. for the financial year 2010-11.

a. who is the holder of share during the year 2010-11?

Mr. X. he is eligible person to get dividend rs. 1,60,000. (till 1-1-2012 Mr X is the holder of shares)

Holding company acquired shares on 1-1-2012 from Mr. X

For the financial year 2011-12. Mr X is holded these shares for 9 months later on holding company for 3 months.

so 9 months dividend relavent to Mr. X. balance 3 months dividend to holding company.

But in case of fixed income investments (dividends) rate of interest is pre defined. we can easily calculate the amount of interest as on date of sale. seller of debentures can collect the inrest for his holding period as on the date settlement.

where as under variable income investments (shares) rate dividend can not be determine as on the date of sale(1-1-2012). it will vary from year to year. it will finalised at Annual general meeting based on profitability of the company. usually AGM will conduct in next financial year.

in your case Mr X. will quote the price of the share by considering dividend relating to 9 months. So share quoted price including dividend. that's why here holding company purchase price includes 9 months dividend, for which previous owner is the holder of shares.

so as per As 13. any dividend relating to pre acquisiton period should adjust from cost of investments.

for example cost of investment is 25,000 acquired on 1-1-2012.

dividend for these shares for the year of 2011-12 is 4000/-, which is received on 1-11-2012.

pre acquisition period is 9 months and post acquisition period is 3 months only.

here post acquisition period dividend is our profit. so simply transferred to profit and loss a/c. (4000 X 3m / 12m)= 1000

pre acquisition dividend = ( 4000 X 9m) / 12m = 3000

As per our discussion initially we have invested 25,000 i.e. inclusive of dividend for 9 months. at that time we can't identify the actual cost. when dividend announced by the company for the particular financial year, we can identify the actual cost incurred for acquisition of shares. i.e. 25,000 - 3000 = 22,000.

by adjusting this pre acquisition dividend we can get actual cost of investment.