[I should be studying]

I don’t understand the answer to this question:

Under the cost method, Dividend revenue in the investor’s income statement would be “The portion of the dividends received this year that were not in excess of the investor’s share of investee’s undistributed earnings since the date of investment.”

The explanation for this is: “The amount of dividend revenue that should be reported in the investor’s income statement for this year would be the portion of the dividends received this year that were not in excess of the investor’s share of investee’s undistributed earnings since the date of investment.”

As far as I know, dividend revenue under the cost method are cash dividends, while stock dividends just reduce the cost basis per share of the investor. Should I assume the “dividends received” in this answer are cash dividends? Also, what do they means by “in excess of the investor’s share of investee’s undistributed earnings?” And what is this excess if not a dividend? Can someone just put this in plain English for me?

REG - 80 (2/28/13)
AUD - 68 (5/24/13), 84 (7/11/13)
BEC - 83 (8/29/13)
FAR - 70 (12/04/13) 80 (2/10/14)

[passedthecpa12.6.13]

Hi, you should google “liquidating dividends.” I understand that normally with the cost method, dividends would be cash and dividend income. However, when your cumulative dividends are in excess of your cumulative cost, it is a liquidating dividend, and your ownership is reduced by, say, the percentage of how much you own in that company multiplied by the cumulative difference (cumulative dividend minus cumulative cost). This exact same thing happens under the equity method when the dividends are in excess of the basis. Hope this helps.

Also, goodluck on FAR. You can definitely pass! 70 is really close

[passedthecpa12.6.13]

Hi, you should google “liquidating dividends.” I understand that normally with the cost method, dividends would be cash and dividend income. However, when your cumulative dividends are in excess of your cumulative cost, it is a liquidating dividend, and your ownership is reduced by, say, the percentage of how much you own in that company multiplied by the cumulative difference (cumulative dividend minus cumulative cost). This exact same thing happens under the equity method when the dividends are in excess of the basis. Hope this helps.

Also, goodluck on FAR. You can definitely pass! 70 is really close

[Author]

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