CFA Practice Question

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CFA Practice Question

When applying the equity method, an investor should report dividends from the investee as:

A. Dividend revenue.
B. A reduction in the investment account.
C. An increase in the investment account.
Correct Answer: B

User Contributed Comments 4

User Comment
katybo inv income is a function of the earnings of the investee and is independent of dividends received, so dividends are recorded as a reduction in investment account. It is like "ex dividend".
quanttrader is it because the investor receives dividend from investee anyhow and therefore will not include it in investment income?
investoprenuer Guess this question answered the queries some might have for the previous question.
davidt876 under the equity method an investment is held as equity (unlike normal investments that are held as assets)

dividends don't increase the value of the equity, they simply represent that equity value being converted into cash on the balance sheet. recognising dividends in the income statement would only increase the equity value which would throw out A = E + L... you'd also be duplicating income as the dividend is already recognised in your % of the entire retained earnings of the investee.

whereas normally when you invest in a stock it's recorded as an asset priced at fair value. when it pays a dividend that increases cash, but the stock's fair value doesn't necessarily decrease by an equal amount (even though EMH says that it should). so under the asset method we have to channel both dividends and unrealised gains/losses into the income statement where they battle it out to either increase or decrease equity
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