Allen Corporation accounts for its investment in the common shares of Burns Company under the equity method. Allen Corporation should ordinarily record a cash dividend received from Young as
A) an addition to the carrying value of the investment.
B) dividend income.
C) a reduction of the carrying value of the investment.
D) contributed surplus.

Question

Quizplus · Accepted Answer

Under the equity method, dividends received from the investee (in this case, Burns Company) are considered a return on investment and thus reduce the carrying value of the investment on the investor's (Allen Corporation's) books. This reflects the fact that the dividends decrease the investee's equity, which is mirrored in the investor's accounting for their share of the investee.

Allen Corporation Accounts for Its Investment in the Common Shares