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Why does the equity method record dividends received from an investee as a reduction in the investment account, not as dividend income?

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Answer:

As per the equity method, the investor do not treat dividend as revenue rather they record the receipt of dividend as a carrying value of investment.

Step-by-step explanation:

As per the equity method, the investor do not treat dividend as revenue rather they record the receipt of dividend as a carrying value of investment. An investor´s account decrease as a dividend is collected, because distribution of cash dividend reduce the carrying amount of investee company.

The double entry for this transaction would be:

Dividend received------- Dr

Carrying amount of investment-------Cr

A parallel is established between investment account and the underlying activities of the investee.

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