Final answer:
Under the equity method which Hiram Co. uses, dividends received from an investment in common stock result in a reduction of the carrying value of the investment. This reflects the return on the investment and avoids double-counting of income. Dividends are not recognized as revenue, but as a decrease in the investment account.
Step-by-step explanation:
When Hiram Co. uses the equity method to account for its investments in common stock, the accounting treatment for dividends received from the investment requires that the investment account be decreased by the amount of the dividend received. This is because the dividend is considered a return on investment, rather than income. Under the equity method, an investor recognizes income as its share of the profits of the investee, which already includes the investor’s share of dividends declared. Therefore, recognizing dividends as income would result in double-counting.
Essentially, when an investor receives a dividend from a company it has an equity method investment in, the receipt of the dividend simply represents a return of some of the investor's cost of the investment. This is opposed to recognizing the dividend as revenue, which would be appropriate under the cost method of accounting for investments, but not under the equity method.
It’s important to recognize that under the equity method, any dividends received reduce the carrying value of the investment on the balance sheet, because those dividends are considered a partial return of the investment. This differs from receiving dividends on stock that are accounted for using the cost or fair value methods, where such dividends would be recorded as dividend income in the profit and loss statement.