Kerstin Ltd owns all the shares in Issac Ltd. On 30 June 2021, Kerstin Ltd had dividend declared of $56,000 and dividend paid of $25,000 while Issac Ltd had dividend declared of $42,000 and dividend paid of $18,000. What consolidation adjusting entry is required to eliminate the dividend receivable on 30 June 2021?

Question

BlackTom AI · Accepted Answer

Restating the scenario and options to begin:
- Kerstin Ltd owns all the shares of Issac Ltd, so Issac is a wholly owned subsidiary.
- On 30 June 2021, Issac Ltd declared dividends of 42,000 and paid 18,000; Kerstin Ltd had dividends declared of 56,000 and paid 25,000.
- In the consolidation process, intercompany dividends (dividends declared/receivable/payable between parent and subsidiary) must be eliminated to avoid overstating revenue and assets.

Option A: Cr Dividend receivable $25,000
- This value corresponds to the dividend paid by Kerstin Ltd to eliminate an intercompany receivable that would arise if Kerstin had a dividend receivable from Issac. However, the question focuses on the dividend receivable arising from Issac to Kerstin (the parent), not Kerstin’s own dividend activity. Therefore this amount does not reflect the intercompany receivable we need to eliminate in the consolidation.

Option B: Cr Dividend receivable $56,000
- This amount matches Kerstin Ltd’s total dividend declared, not the intercompany dividend receivable from Issac to Kerstin. It overstates the element to be eliminated and blends in a dividend that is not the intercompany receivable under consideration here. This is not the correct target for elimination.

Option C: Cr Dividend receivable $18,000
- This figure equates to the amount Issac paid in dividends (cash outflow by Issac), not the intercompany dividend receivable that Kerstin would hold from Issac at 30 June 2021. The consolidation adjustment concerns the outstanding intercompany dividend receivable, not the cash paid.

Option D: Cr Dividend receivable $42,000
- This is the amount of dividends declared by Issac Ltd (the subsidiary) that would form an intercompany receivable from the subsidiary to the parent. In consolidation, we must eliminate this intercompany asset (dividend receivable) against the corresponding intercompany equity/ earnings adjustment. Therefore, crediting the Dividend receivable for 42,000 correctly removes the intercompany balance from the consolidated records.

Putting it all together, the only option that correctly identifies the intercompany balance to be eliminated on 30 June 2021 is the 42,000 intercompany dividend receivable from Issac to Kerstin, which is eliminated by crediting Dividend receivable $42,000.

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