For question #2 we are asked “On its 2011 income statement, the amount of AdOre’s net income that Strawberry Mines reported was closest to (in thousands)”
ANSWER: In 2011, Strawberry Mines used the equity method because it exercised significant influence and owned 32% of AdOre. Under the equity method, it should recognize its percentage share (32% × 18,182 = 5,818.2) of AdOre’s net income.
I thought under the Equity Method we have to subtract our share of dividends from our share of the subsidiary’s net income? Why didn’t we subtract dividends from net income in this case?
You recognize the FULL percentage of net income in the income statement.
In the investment account on the balance sheet, you would subtract the dividends, but not in the income statement.
This is a common source of confusion. To be completely clear on this:
Your Income statement is impacted by EQUITY INCOME
EQUITY INCOME = % NI - %Extra Dep - %intercomp Transactions (Dividends are NEVER included in the Income statement calculation for this question)
Your Balance sheet or Investment account changes by cash paid + EQUITY INCOME - % Dividends
% Dividends DOES come into play on B/S calcs.
The CFA Blue boxes for this chapter are fantastic, I recommend going through them, you will need to have a strong handle on this as it is a certainty for the exam