Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity method. Olde Corp. should record a cash dividend received from Young as
A) a reduction of the carrying value of the investment.
B) additional paid-in capital.
C) an addition to the carrying value of the investment.
D) dividend income.

Question

Quizplus · Accepted Answer

Under the equity method, dividends received from the investee (in this case, Young Inc.) are considered a return on investment and thus reduce the carrying value of the investment on the investor's (Olde Corp.'s) books. This reflects the assumption that the dividends are paid out of the earnings that have already been recognized in the investor's income, and thus, they do not represent additional income at the time of receipt.

Olde Corp Accounts for Its Investment in the Common Shares of of Young