How to account for associate income and dividends?

A few questions on intercompany investments with associates:

  1. Let’s say the parent owns 50% of the subsidiary; the sub’s income is $100k and assumes no dividends paid, the parent’s investment account of the sub increases by $50k. Why are we accounting for the value of the sub through its net income, and not its fair value change?

  2. When the investment account increases by $50k for the parent, how is this increase balanced? Is it in shareholder’s equity?

  3. In the case the subsidiary pays out a dividend of $50k, the parent’s investment account increases by $25k in this case. How is the income statement and cash flow statement affected in this case?

Thanks in advance

I presume that you’re talking about using the equity method.

Because that’s what the accounting standards say to do.

We show $50,000 in Income from Affiliate, which is closed out to Retained Earnings. Shareholders’ Equity increases by $50,000.

There . . . that’s better.

There’s no effect on the income statement.

The cash flow statement shows a cash inflow from investing (CFI) of $25,000: dividends.

You’re welcome in arrears.