Final answer:
Howell Co. will report a cash dividend as income with the fair value method but as a reduction in the investment account with the equity method. The accounting for dividends differs from capital gains, which are realized when selling an asset at a higher price than its purchase value.
Step-by-step explanation:
When Howell Co. receives a cash dividend from a common stock investment, the accounting treatment of the dividend depends on the method used for accounting the investment. If Howell Co. accounts for the investment using the fair value method, the cash dividend received is typically reported as dividend income in the income statement, and it does not affect the investment balance on the balance sheet. Conversely, if the investment is accounted for using the equity method, the cash dividend is considered a return on investment and results in a decrease to the investment account on the balance sheet, reflecting the distribution of profits.
Understanding the difference between capital gains and dividends is also key. Capital gains arise when an investor sells an asset for more than its purchase price, while dividends are direct payments made by a company to its shareholders from its earnings. Both are forms of return on investment to shareholders but are accounted for differently.