The parent entity, Olivia Ltd, has received a bonus dividend paid from its subsidiarys post acquisition profits. The accountant for Olivia Ltd, Lu Rong, is concerned that if on consolidation the total effects of this transaction have to be eliminated, then this will show a misleading financial position for the group. Her concern is that the subsidiary, by making a bonus dividend, has reduced the ability of the group to pay cash dividends. The consolidation adjustments will result in this fact not being made known to the users of the consolidated financial statements.

Required Discuss whether Lu Rong has cause for concern, and what options are available for her in accounting for the bonus dividend