[tim_wolf78]

Cost Method – I am a bit confused on when to recognize dividends as dividend income or investment in investee(not income). Can someone help clarify to make this easier?

FAR: 86
REG: 75
BEC: 75
AUD: 78 (EXPIRED); 5/30/14????

[Anonymous]

Tim,

For dividend income under the cost method (<20% ownership of the company) you would treat dividends received from the investee as a Debit to cash and a credit to investment income.

Alternatively, if the company you have invested in distributes a dividend the exceed their retained earnings you would treat that as a reduction in your investment proportional to the amount you are investing. For example:

I own 10% in ABC, Inc and ABC distributed $10,000.00 to shareholders in dividends but their retained earnings is at $8,000.00 On my books I will record the dividend as follows.

Dr: Cash $1,000.00

Cr: Dividend Income $800.00

Reduction in Investment $200.00

Hope this helps.

[kctiger]

To piggy back on dutkas' response:

Cost Method: you treat dividend income as income, period. So take your % of ownership and multiply that by the amount of total dividends paid, and that is your income. It does not impact your investment. Unless the dividends paid are liquidating (i.e. they are in excess of the investee's retained earnings), your investment does not change.

On the flip side, if you use the equity method, dividend income reduces your investment, but does NOT impact the income statement. Easiest way to think of this is that if you have equity in the company, receiving dividends is like transferring money from your savings account to your checking account. So you add cash, but you lose investment. The income you make with equity is the actual income earned by your investee (i.e. their net income x your % investment).

[Author]

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