For question #1 in this topic test, relating to investment income using the equity method, why shouldn’t you subtract out the share of dividends from the answer?
Never mind. I think it’s because it’s referring to the income statement account rather than the investment value in assets. I hope that’s right…
Right, think of it this way:
You own 25% of a company with Net Income of $100. How much should you recognize as income under the Equity Method?
$25 right. Let’s say they dividend out the whole $25. Should you now recognize $50 in total? That would be double-counting.
That’s just another way to think about it.