Accounting for capital loss and dividends
I am hoping someone can help me with the following query:
There are two companies, A and B. Both are owned 100% by the same director/ shareholder. Company B then buys the shares in Company A at an arms length valuation of £20,000. Six months later Company A ceases to trade and is effectively worthless.
We are drawing up the first year's accounts for Company B. It has accounted for the share purchase as Debit Fixed Asset Investment £20,000, Credit Other Creditors £20,000. Then, it recognises the loss and enters: Dr Loss on Investment (P&L) £20,000, Cr. Fixed Asset Investment £20,000.
If you ignore the above, and tax, the company has otherwise made a profit of £50,000 and the director/ shareholder has extracted £40,000 as a dividend. BUT...once you take into account the loss on the shares the reserves are "only" £30,000 so the dividends are illegal.
The question is...is there a way in the accounts to treat the £20,000 as a capital loss separate to the distributable reserves so the dividends are not illegal? Adding the loss back in the tax computation and showing it as a capital loss is great for the tax return but doesn't help with the accounts! I could show it as an exceptional item, but IRIS seems to automatically take it out of distributable reserves anyway so I am back to square one.
Is there a way for IRIS to somehow show it "below the line" so the dividends do not look illegal? Or can - or should - the £20,000 be shown as a capital distribution somehow ? Or should I call the £20,000 a "negative capital reserve" on the balance sheet, which sounds and is ridiculous as far as I can see!
I would appreciate any help with this.
- Direct debit entry query 91 3
- Moneysoft and People's Pension 692 10
- Do most of you still use MS Office? 1,068 18
- Client needs a UK tax residency certificate for Spanish tax authorities 21 1
- IT advisory questions? 361 10
- Homing sandwiches 736 16
- Acounting Courses 80 1
- Mileage allowance payment via payroll 91 2
- Can you help me spot errors? 103 1
- signature required 790 30
- Any constructive answers? 292 6
- Stock Control System for Ecommerce Website 258 2
- Dividend Waiver and Settlement Legislation 78 1
- When to leave the VAT FRS 131 6
- Corporation Tax return - more than one trade 211 2
- Use of home query 383 7
- Suggested tips to become a better accountant? 294 7
- EU eservices VAT change imminent 537 11
- CIS software 195 5
- Small bus. accounting software with departments 157 4
- Auto enrolment excuses 1,285
- Feedback on accounts production software for IFRS 843
- Add T&Cs to Sales Order in Sage 535
- Digita Hosted Software 349
- Credit where credit's due....... 326
- Buying goods in US and selling them to company in US 250
- Flat rate VAT- other income calculation 212
- TheTax Donut 208
- Double taxation relief - same income, different individual 176
- Semi retired FCA or equivalent 154