High School

Q 12: XYZ Ltd purchased 80% shares of ABC Ltd on 1st January 2016, for ₹14000.
The issued capital of ABC Ltd on 1st January 2016 was ₹100000 and the balance profit and loss account was ₹60000.
During the year ended 31st December 2016, ABC earned a profit of ₹20000 and at year end, declared and paid a dividend of ₹30000.

Show by journal entry how the dividend would be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1st January 2016 and 31st December 2016?

Ans: Minority interest 1.1.2016 ₹32000, 31.12.2016-₹30000.

Answer :

In this question, we're dealing with a situation in which XYZ Ltd has purchased 80% of the shares of another company, ABC Ltd, and we need to account for dividends received and determine minority interest at two different points in time.

Solution:

Journal Entry for Dividend

  1. Recording Dividend Received:
    Since XYZ Ltd owns 80% of ABC Ltd, they are entitled to receive 80% of the dividend declared by ABC Ltd. The total dividend declared by ABC Ltd is ₹30,000.

    [tex]\text{Dividend received by XYZ Ltd} = 0.8 \times 30,000 = ₹24,000[/tex]

    Journal Entry in the books of XYZ Ltd:

    • Bank Account (or similar) Dr. ₹24,000
    • Investment in ABC Ltd Account Cr. ₹20,000
    • Dividend Income Account Cr. ₹4,000

    Here, the 'Investment in ABC Ltd Account' is reduced by an amount equal to the retained earnings portion of the dividend received.

  2. Recording Minority Interest Dividend:
    The remaining 20% of the dividend belongs to the minority interest.

    [tex]\text{Minority interest dividend} = 0.2 \times 30,000 = ₹6,000[/tex]

Minority Interest Calculation

  1. As on 1st January 2016:

    • Minority Interest represents the ownership of other shareholders who do not belong to XYZ Ltd, which is 20% of ABC Ltd.

    [tex]\text{Minority interest on shares} = 0.2 \times 100,000 = ₹20,000[/tex]
    [tex]\text{Minority interest in P\&L} = 0.2 \times 60,000 = ₹12,000[/tex]

    • Therefore, the total minority interest on 1st January 2016 is:
      [tex]\text{Total minority interest} = 20,000 + 12,000 = ₹32,000[/tex]

  2. As on 31st December 2016:

    • Profit for 2016 is ₹20,000, so the minority share of this profit is:
      [tex]\text{Minority profit share} = 0.2 \times 20,000 = ₹4,000[/tex]

    • Adding the profit share to the existing minority interest:
      [tex]\text{Total minority interest 31st December 2016} = 32,000 + 4,000 - 6,000 = ₹30,000[/tex]

    Here, ₹6,000 is subtracted because it represents the dividend paid out to the minority shareholders.

This comprehensive solution outlines the process of recording dividends in the books of XYZ Ltd and calculating the minority interest at two points in time, considering company shareholdings, dividends, and annual profits.

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