28 May 2015
When we buy investments from a person and the dividend for the prior period is to be paid then he is waiting for the dividend. The company will pay the dividend to the registered member on the record date. So we agree to pay the seller the price for investment as well as the dividend which we will recover from the company anyway. When we recover this dividend we deduct it from the cost of investment.
For example, a person has been holding an share for the year 2014-15 for which the has still not paid the dividend till now, i.e. May, 2015. The expected dividend is Rs.5 per share. The agreed price of the share excluding the dividend is Rs.120. The company will be paying the dividend in September, 2015. We want to buy the share immediately so we agree to pay the seller Rs.125 which is Rs.120 for the Rs.5 for the dividend which he would have got from the company. When we receive the dividend from the company in September, 2015 we will deduct it from the cost of the share Rs.125 as the actual cost of the share excluding the dividend was Rs.120. The dividend income is not our income because it is for the year 2014-15 when it was not our investment. Hence, pre-acquisition dividend is deducted from the cost of the investment.
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