Dividends under Equity Method..

CFA Level II
#1

I cant find a clear answer on this, so could someone confirm my thinking here: Under the Equity Method of accounting for acquisitions, the dividends does NOT flow through the IS on its way to lower assets. Is that correct?

#2

Pro-rata share of dividends of Sub is removed from the Investment Equity Account on the Parent.

#3

that is correct. Dividends decrease the corresponding investment asset directly in the BS.

#4

why would it not go through the income statement? i thought it counts as dividends received, probably non-operating income (still on IS)

#5

It does not touch the I/S, but you do record on the I/S your income share from the sub.

#6

Thanks guys… Love all this forum traffic…

#7

It doesnt go through the Income statement because its considered a return on the investment you originally made. Thats why it lowers the asset on the balance sheet. Basically a repayment of the initial outlay.

#8

It lowers the investment asset, but increases cash.

#9

how does it increase cash without going through the income statement

#10

supersharpshooter Wrote: ------------------------------------------------------- > how does it increase cash without going through > the income statement You are being paid a dividend. In this case, it is a return of capital, not a return ON capital. Big up to my boy John Harris

#11

I just posted this in another thread. Equity Income is ONLY the share of NI. That is what hit’s the income statement The Cash flow reconciliation from NI will back out the non-cash income from equity affiliates and ADD any dividend received. The B/S account will increase by the amount of the NI less and dividend received.

#12

Here are the journal entire in case you wonder. Share of income Dr. Inv. Account (BS) Cr Income Account (IS) Share of div Dr. Cash (BS) Cr. Inv. Account (BS)