Question

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the net income of the investor under the Fair Value Method and the Equity Method, respectively?

Answer 1

Under the equity method, cash dividends reduce the carrying value of the investment account (asset account), they are not considered income. For e.g.

Journal entry to record investment

Dr Investment in Santo Corporation 100,000

Cr Cash 100,000

Journal entry to record cash dividend

Dr Cash 5,000

Cr Investment in Santo Corporation 5,000

Under the fair value method, cash dividends are considered income. For e.g.

Journal entry to record investment

Dr Investment in Santo Corporation 100,000

Cr Cash 100,000

Journal entry to record cash dividend

Dr Cash 5,000

Cr Dividend income 5,000