Taguchi Ltd. owns 80% of Shag Co. Shag declared and paid $100,000 in dividends. Taguchi uses the cost method to record its investment in Shag. In preparing Taguchi's consolidated financial statements, what elimination entry must be made with respect to the dividends?
A) $$\begin{array} { | c | c | }
\hline \text { DR Dividend income } & 30,000 \
\hline \text { CR Dividends declared } & 80,000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | }
\hline \text { DR Dividend income } & 30,000 \
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | c | }
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 20,000 \
\hline
\end{array}$$
D) $$\begin{array} { | c | c | }
\hline \text { DR Dividend income } & 100,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$

Question

Taguchi Ltd. owns 80% of Shag Co. Shag declared and paid $100,000 in dividends. Taguchi uses the cost method to record its investment in Shag. In preparing Taguchi's consolidated financial statements, what elimination entry must be made with respect to the dividends?
A) $$\begin{array} { | c | c | } 
\hline \text { DR Dividend income } & 30,000 \
\hline \text { CR Dividends declared } & 80,000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | } 
\hline \text { DR Dividend income } & 30,000 \
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | c | } 
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 20,000 \
\hline
\end{array}$$
D) $$\begin{array} { | c | c | } 
\hline \text { DR Dividend income } & 100,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$

Quizplus · Accepted Answer

Since Taguchi owns 80% of Shag, it is entitled to receive 80% of the dividends declared and paid by Shag. The remaining 20% of dividends belongs to minority shareholders. Therefore, the elimination entry must eliminate the impact of the intra-group dividend payment on Taguchi's consolidated financial statements. The entry would be: 
Debit: Investment in Shag (Cost method) - $80,000 (80% × $100,000)
Credit: Dividend income - $80,000
Credit: Non-controlling interest in Shag - $20,000 (20% × $100,000) 
The entry above reduces the investment in Shag to its original cost and recognizes only the portion of the dividend income attributable to Taguchi's ownership interest. The remaining 20% of the dividend income is allocated to non-controlling interest.

Taguchi Ltd DR Dividend income 30,000 CR Dividends declared 80,000\begin{array} { | c | c | } \hline \text { DR Dividend income } & 30,000 \\\hline \text { CR Dividends declared } & 80,000 \\\hline\end{array} DR Dividend income CR Dividends declared ​30,00080,000​​

Taguchi Ltd $\begin{array} { | c | c | } \hline \text { DR Dividend income } & 30,000 \\\hline \text { CR Dividends declared } & 80,000 \\\hline\end{array}$