Question

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as?

1) a reduction of the carrying value of the investment.
2) additional paid-in capital.
3) an addition to the carrying value of the investment.
4) dividend income.

Answer 1

Under the equity method, a cash dividend received by Koehn Corporation from Sells Company is recorded as a reduction in the carrying value of the investment, not as dividend income.

Step-by-step explanation:

When Koehn Corporation, accounting for its investment in the common stocks of Sells Company using the equity method, receives a cash dividend, this dividend should be recorded as a reduction of the carrying value of the investment. This means that any cash dividends received from the investment effectively return a portion of the initial investment back to Koehn Corporation, decreasing the value of its stake in Sells Company on the balance sheet. This accounting treatment differs from recognizing the dividend as dividend income, which is how dividends are typically recorded when investments are accounted for using the cost method or market value method.