In the equity method, if you own 30% of a company and the subsidiary reports $100 in Net Income and pays $20 in dividends, you would increase the investment account on the balance sheet by $30 and report $30 in the income statement. BUT if you subsequently reduce the investment account by $6 (.30*20) How does the accounting equation balance???
On the BS, a non-current asset account names investment is created wich equals the initial investment. Normally, cash is reduced by the same amount. Then, subsequent investee’s earning increase the investment account, dividends received from the investee reduce the investment account. To balance, retained earnings should be added. Dividends received from the investee are not recognized in the income statement. I don’t know if my understanding is right.
I think its just the following: Debit Equity Asset $30 Credit Income $30 Debit Cash $6 Credit Equity Asset $6