Net income from an investment using equity method

CFA Level II
#1

I thought under the equity method, the net income from an investment is my share of the company * (net income - dividends).

But in the AdOre case on CFAI practice assement, it asks how much net income should be reported in investor’s income statement, and it says I should only recognize percentage share of investment’s net income. It looks like it’s contradicting what I learned so far by not subtracting the dividends.

Subsequent problem talks about dividends recieved from the investment (the term “received” is confusing here because I thought I’m supposed to subtract them from net income). The problem does say something like "it will not report and dividends received from the investment as income but would have deducted the dividends received from the carrying value of the investments.

To sum up, two questions: 1. Do I subtract dividends of an investment under equity method when calculating net income from the investment? 2. Can someone explain the second bolded sentence? Does that mean dividends paid out from an investment should be reflected under balance sheet?

Thank you.

#2

If you are asked to calculate net income from the equity investment, there is no need to subtract the dividend received. You only subtract the dividend when calculating the ending investment account.

#3

That makes sense…thanks for the help

#4

But you do not add it, either. Just ignore the dividend, the net income from the investment is the company’s NI * owenership percentage.

#5

Minus depreciation of excess FV of tangible assets over BV.

#6

1+. Yes.

I didn’t mention this because the OP seemed to be only confused about what to do with dividend when calculating an equity net income.