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Dividends on Interim Accounts

Double entries on dividends (IC & distributable to directors) and other queries

Hi,

Can you please help me with the dividends queries below?

Context:

Dividends are paid to Directors out of the holding company.

At year end 31/03/2018 no dividend was voted even though the Group was overall profitable.

Holding Company – Negative Reserves of £250,000

Sub A – Positive Reserve of £650,000

Directors now want to get paid £100,000 in dividends in 4 instalments of £25K.

The relevant accounts for the holding company at 31/03/18 show that there are no distributable reserves as those are negative.

We want to use the current interim accounts to distribute a dividend out of Sub A to the Holding co of £400,000 which will bring the holding reserves to the level where we can actually distribute dividends.

1)  Assuming no changes to the amounts above (in the current year) can you please help me with the double entry for: a) IC transactions and b) the actual dividend payments.

Interco:

Sub A Interim Accounts:

Dr Reserves (BS) 400K

Cr Intercompany (BS) 400K

Holding Company:

Dr Intercompany (BS) 400K

Cr Dividends (PL) 400K

Dividend Payments (4 instalments)

Dr Reserves (BS) 25,000

Cr Bank (BS) 25,000

2) Now what happens to dividends if the company start making a loss in the current year which wipes out last year’s profit? The company is still profitable so not an issue but considering that lots can change until 31/03/2019 what happens then?

Thanks,

Victor

Replies

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23rd Nov 2018 16:30

This is a question for the group's accountants to answer. They will then be able to advise on the book entries for the accounting treatment that is decided upon.

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23rd Nov 2018 16:38

This isn't a question about bookkeeping entries, is it?
Is it really about directors wanting to be paid and using iffy interim accounts to facilitate it? Apologies if I've got the wrong end of the stick.

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24th Nov 2018 09:45

You might be overthinking the whole exercise. I'm assuming that the subsidiary is 100% owned by the holding company. I'm assuming that the subsidiary hasn't lost more than £250K since the last year end.

Can't see a problem with the subsidiary paying the holding company the £400K dividend but surely the entry is Dr Reserves and Cr Bank isn't it? Not sure why a debtor/creditor relating to "Inter Company" should appear.

What happens to the profit or loss after the distribution is irrelevant. You need evidence that the company has the distributable reserves at the time of the dividend.

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to thomas34
25th Nov 2018 10:18

thomas34 wrote:

Not sure why a debtor/creditor relating to "Inter Company" should appear.

I assume that’s because the intra-group dividend is not being paid in cash.

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to johngroganjga
26th Nov 2018 09:13

That's correct, no cash as we operate using a cash-pool out of the holding, so just a simple journal.

Just so I have covered all angles, would you mind clarifying if the below entries are also a possibility:

1) Instead of crediting the PL in the holding can I
DR IC 400K
CR Reserves 400K ?

Or as an alternative can I
DR IC 400k?
CR Reserves 300k?
CR DLA 100K?

Thank you for clarifying.

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to victorsales
26th Nov 2018 11:12

The dividend is income for the holding company so has to go through its P&L.

What transaction would the credit to DLA reflect?

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to johngroganjga
26th Nov 2018 11:40

The amount to be paid to directors as their dividend. As the 100K would be paid in 4 instalments we would like the liability to be shown in a separate account. Thanks for confirming.

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to victorsales
26th Nov 2018 14:18

Well the payment of a dividend by the holding company is a separate event from the payment of a dividend by the subsidiary. Obviously your credit to the directors is fine to deal with the former, but your credit to reserves of £300k is two different things. It is the dividend received of £400k less a dividend paid of £100k. Those two amounts go in different places in the accounts. Best to keep them separate in your book-keeping as well.

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to johngroganjga
27th Nov 2018 09:11

John, this was really productive! Thank you so much for your input! Appreciated.

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