In CFAI , vol 2, page 22, example 5, it shows: 1. Company W acquires 25% of company F for $1m, while BV = $3.8m. 2. The $50k difference (they should’ve paid 0.25*$3.8=$950k) is attributable to $10k for building and $40k goodwill. Then it says that company F paid a dividend of $3.2k and had earnings of $20k. F also sold some goods to W (upstream) which remained in W’s inventory, for which F recognized $8000 of profit. Here is the question. In calculating the equity income for W, they included $5k for their share of the earnings in F (25% of $20k), which is good, but they did not include the dividends received, which is 25% of $3.2k. They did deduct 25% of the $8k unrealized profit, which is ok, and they also deducted $500 for depreciating the building (which is ok). Why hasn’t W recorded the dividends it received from F?
equity income does not include the dividend income. It is a reduction in the investment in subsidiary… this is a typical trip-up point.
so for minority passive investments you would record dividend in I/S but not under minority active investments ? Cool.
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Minority passive and minority passive have two different accounting methods. For the minority active, you use the equity method, because you exercise significant influence, 20-50% ownership generally. Minority passive, you don’t use the equity method, you have no significant influence. as cpk said, under equity method, dividend is not income, it is considered as a return of capital from the investing in the subsidary.