If a 70% owned subsidiary pays a dividend of 5, what is the net effect on cash at period end?

If a 70% owned subsidiary pays a dividend of 5, what is the net effect on cash at period end?

• A. Cash decreases by 5
• B. Cash decreases by 1.5
• C. Cash increases by 3.5
• D. Cash increases by 5

Answer: (B)

When a parent company owns a subsidiary, dividends from that subsidiary must be treated by ownership in the consolidation process. Dividends paid to the parent are an intercompany cash flow and are eliminated in consolidation, while dividends paid to noncontrolling interests are cash outflows to outsiders and remain in the consolidated cash flow. Here, the subsidiary pays a total dividend of 5. The parent owns 70% and the noncontrolling interest owns 30%, so the cash is split as 3.5 to the parent and 1.5 to the noncontrolling shareholders. The 3.5 received by the parent is an intercompany transfer and is eliminated in the consolidated statements, so it does not affect the group’s net cash. The 1.5 going to noncontrolling interests is a cash outflow outside the group and does reduce consolidated cash. Therefore, the net effect on cash at period end is a decrease of 1.5.

When a parent company owns a subsidiary, dividends from that subsidiary must be treated by ownership in the consolidation process. Dividends paid to the parent are an intercompany cash flow and are eliminated in consolidation, while dividends paid to noncontrolling interests are cash outflows to outsiders and remain in the consolidated cash flow.

Here, the subsidiary pays a total dividend of 5. The parent owns 70% and the noncontrolling interest owns 30%, so the cash is split as 3.5 to the parent and 1.5 to the noncontrolling shareholders. The 3.5 received by the parent is an intercompany transfer and is eliminated in the consolidated statements, so it does not affect the group’s net cash. The 1.5 going to noncontrolling interests is a cash outflow outside the group and does reduce consolidated cash.

Therefore, the net effect on cash at period end is a decrease of 1.5.