# Intercorporate Investments (Equity) and Dividends

Hi It was not clear from the reading… can anyone help on this? Company ABC buys 30% of Company ZZZ, it is classified as a equity method investment. Company ZZZ has zero net income for 2008, but pays 1,000,000 in dividends. On ABC’s balance sheet, the investment in ZZZ is reduced by the dividend amount (-300k) Question 1: Does the 300k in dividend income also get recognized in ABC’s income statement? Question 2: If the 300k in dividend income is recognized, is it off-set by the 300k reduction in on ABC’s balance sheet, so in reality it is +300k -300k = 0.00 total Thanks! JerC

Nevermind, the answer is on page 24 of the Financial reporting book… “dividends from associated companies are not included in investor income b/c it would be a double counting”

Lets say P and S P invest 1000 in S for 30% stake Later on, S has a Net income of 500\$ and Div of 200\$ BS transactions -------------------- 1000 + 150 - 60 = 1090 IS Transaction ------------------ 150 Summary to your questions A1: 300K is the dividend from Subsidiary - which is not included in the Income statement of the Parent in Equity Method A2: Refer A1

Yup no dividends. BV is reduced by 300k, so equity drops. But cash also goes up by 300k so total assets goes up by 300k.

swaption: Should clarify that’s because this is classified using Equity Method.

thanks!

BiPolarBoyBoston Wrote: ------------------------------------------------------- > Yup no dividends. BV is reduced by 300k, so equity > drops. But cash also goes up by 300k so total > assets goes up by 300k. Wait, let me make sure I’m reading this right: are you saying that given the setup at JerCity provided, you’re saying that total assets go up by 300K? I don’t think that’s right - wouldn’t cash go up by 300K (div received), and the investment in subsidiary go down by 300 (since it’s the equity method), giving us no change in total assets (cash = current asset and investment in sub being non-current asset)? I thought there’d be no change in total assets, and no additional income from the sub…

this is how i am thinking about it… in this example let me add that the original investment made by ABC in ZZZ is 1,000,000 Before any dividends Company ABC ***Balance Sheet Cash 0.00 Investment in Related… 1,000,000 ***Income Stmt Income from related… 0.00 Dividend payment ABC will receive the cash of 300k, they own the stock, they get the money At the same time, that dividend is “gone” from the investment… ZZZ can’t use the cash to generate future earnings, so the investment on the books of ABC has to be written down by 300k. After Dividend payment ***Balance sheet Cash 300,000 Investment in related… 700,000 ***Income Stmt Investment in related… -300,000 Dividend Income… +300,000 income for the period = 0.00 any thoughts??? JerC

Can you give us the page number from the CFAI reading where you are struck? Becase it is as simple as it can get, by saying that - For Equity Method, only number that hits the income statement is that pro-rated income genereated by the subsidiary. Dividends don’t hit the income statement, they go to balance sheet and reduce the investment account.

yfactor Wrote: ------------------------------------------------------- > BiPolarBoyBoston Wrote: > -------------------------------------------------- > ----- > > Yup no dividends. BV is reduced by 300k, so > equity > > drops. But cash also goes up by 300k so total > > assets goes up by 300k. > > Wait, let me make sure I’m reading this right: are > you saying that given the setup at JerCity > provided, you’re saying that total assets go up by > 300K? I don’t think that’s right - wouldn’t cash > go up by 300K (div received), and the investment > in subsidiary go down by 300 (since it’s the > equity method), giving us no change in total > assets (cash = current asset and investment in sub > being non-current asset)? > > I thought there’d be no change in total assets, > and no additional income from the sub… Yash - you are correct. CA goes up (because of cash) and Investment account goes down by the dividends repatriated from sub to parent. So effectively TA = n/c

Blah, your right. TA does not go up. I thought the investment was apart of equity portion of the balance sheet. Sorry!