Reading 14 EOC 9

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IMO the answer would be 75 + (68*0.5 - 22*0.5) = 98. Please tell me why the dividends aren’t taken into account. thanks

The confusion here is that the dividends don’t affect the investor’s equity income, they simply reduce the carrying balance of the investment in the associate. Therefore the consolidated single line income comprises the parent’s net income plus the proportionate share of the associate’s income; the dividends won’t actually be reported in the investor’s P&L.

so when are dividends reduced?

Under the equity method, dividends are considered a return _ of _ investment, not a return on investment. They never appear on an income statement.

Would say that for the exam the key words we will need to watch out for will be along the lines of “At the end of year 20XX, what is the size of Company A’s investment in Company B” etc. In this circumstance be careful to reduce the carry value by the proportionate share of the dividends paid (ie a return of capital as s2000 noted), obviously assuming that the equity method is being used!! A question around income like the one you have mentioned is possibly a trap that might be thrown in the mix somewhere.