[cpa1988]

I am confused about the $6000 liquidating dividend. Since they own 5%, this would be accounted for under the cost method. There is a journal entry in the Becker book that shows you debit cash and credit the investment account and the dividend income account for a liquidating dividend accounted for under the cost method (F3 page 19). If that is so then why isn’t the $6000 included in income?

Information pertaining to dividends from Wray Corp.’s common stock investments for the year ended December 31, Year 1, follows:

On September 8, Year 1, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray’s directors are also directors of Seco.

On October 15, Year 1, Wray received a $6,000 liquidating dividend from King Co. Wray owns a 5% interest in King Co.

Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, Year 1, to stockholders of record on December 15, Year 1, payable on January 5, Year 2.

What amount should Wray report as dividend income in its income statement for the year ended December 31, Year 1?

a. $4,000

b. $10,000

c. $60,000

d. $56,000

Explanation

Choice “a” is correct. $4,000 dividend income should be reported in income statement.

[SkilletCPA]

A liquidating dividend is a reduction in the investment regardless of the percentage of the entity owned. With the Seco dividend there is significant influence over the investee, therefore the equity method is used. The investment in King is a 5% interest which would ordinarily mean the cost method would be used. However, it states that the dividend is “liquidating” for which you must decrease the investment in the investee. Think of it as you the company is returning their Owners' Equity to their investors, meaning your investment is given back to you. Finally, the dividend received from Bow is not liquidating nor is there significant influence and would result in cash received of $4,000 (2%*$200,000).

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[leglock]

excellent explanation.

With respect to the Becker book page you cite, they may have been showing you the correct treatment when only part of the dividend is liquidating. In that case, the portion of the dividend that is not liquidating would be recognized as dividend income. In the question you posted above, it is assumed the entire dividend is liquidating and therefore none of it is dividend income

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