# Equity Method and Dividends

Can someone tell me why we subtract the dividends received when we calculate the investment value in an affiliate?

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Dividends received are considered a return of investment, not a return on investment.

Why?  Because that’s what accountants decided, that’s why.

Simplify the complicated side; don't complify the simplicated side.

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i think i got it.

I will use the Retained Earnings to calculate the investment value

Onda wrote:
i think i got it.

I will use the Retained Earnings to calculate the investment value

How, exactly?

Simplify the complicated side; don't complify the simplicated side.

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lets say A owns 20% of B . The purchase price of B was \$100. B made NI of \$40 and paid \$10 in dividends (RE=\$30)

Investment value in A’s financial statement is \$100\$ +0.2*\$30=\$106

Onda wrote:
lets say A owns 20% of B . The purchase price of B was \$100. B made NI of \$40 and paid \$10 in dividends (RE=\$30)

Investment value in A’s financial statement is \$100\$ +0.2*\$30=\$106

\$30 is not (necessarily) B’s Retained Earnings.

It might be B’s change in RE.

Simplify the complicated side; don't complify the simplicated side.

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yes, you are right because the actual retained earnings include all the previous earnings.

Onda wrote:
yes, you are right because the actual retained earnings include all the previous earnings.

Exactly!

That’s why I was puzzled when you said you’d use RE.

Simplify the complicated side; don't complify the simplicated side.

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http://financialexamhelp123.com/

gotcha. Thank you!