equity method example on page 139, vol 2

i am looking at the example 5 (wicker acquired 25% of foxworth). question #1 asks to calc equity income to be reported on wicker’s income statement. in all previous examples we would take 25% of foxworth’s net income and subtract 25% of it’s dividends. but in this solution we do not subtract the dividends - WHY IS THAT ? is it a mistake ?

under the equity method you account for dividends as a return of captial on your initial investment and it reduces the carrying value of the investment on the balance sheet. At it’s simplest what goes to the income statement is simply pro rata share of earnings from the investee.

why you want to count the equity method’s money?

THink of it like this: Would Foxworth report its NI minus dividend? Of course not. Wicker has to do the same…

Dividends are subtracted for the balance sheet amount (i.e. Beginning investment in affiliate + Share of NI - Share of Dividends = Ending investment in affiliate) Share of NI of affiliate is reported in Income Statement without adjustment for dividends. Hope it is helpful :slight_smile: