Dividends

Q:  Our accountants are having trouble understanding the dividends paid to parent and dividends paid to subsidiaries.  We have all read the book, and we are still vague as to how we calculate the exact dividends.  As you know, accountants need exact numbers and they are confused.

A:  Dividends are not paid to subsidiaries, as they do not invest in the stock of other companies.  Dividends paid by the parent company to stockholders result from your decisions.  Your team is in complete control of the amount of the payment, as entered on your decision form.

Dividend payments of subsidiaries are limited to 80 percent of net subsidiary profits until accumulated retained earnings in the subsidiary have been built up to 50 percent of the book value of capital stock.  After that, 100 percent of retained earnings may automatically be paid as dividends to the parent firm, subject to the following restrictions:

Dividend payments may not reduce a subsidiary's cash balance below $100,000 (in Merican subsidiaries) or Ps 1,000,000 (in Sereno).

Dividends will not be paid if a subsidiary’s accumulated earnings were negative in the previous quarter.

After retained earnings reach 50 percent of capital stock, dividends that are missed because of a cash shortage may be paid in subsequent quarters when more cash is available. This is company policy.

The parent company's account "Dividends from Subsidiaries" reflects how much is received by the parent and the sum of subsidiary dividends paid to the parent should equal the amount of "Dividends from Subsidiaries."  As Internal transfers, these amounts net out and do not show on the consolidated statements.