[Anonymous]

Can someone please explain to me the concept of liquidating dividends from the investment chapter. The help would be much appreciated. Thank you.

[Sudad]

As far as I remember, liquidating dividends are return of capital in the form of dividends. It is not a dividend income but a return of your investment. So, the basis of your investment will be lessen by the amount of the liquidating dividend. Also, it's not taxable since it's not an income.

DONE!!!

[raymondsfamily]

In terms of the Cost Method, the investor will initially record the investment as a DR to Investment in Investee and a CR to Cash. Because the investor only has <20% ownership in the investee (and does not exert significant influance), the general activity that will be recorded is dividend income (in proportion to the % of ownership). The thing to remember is that the investor owns a percentage of the retained earnings in the investee (in proportion to the % of ownership) – anything received in terms of cash in excess of the dividend income reduces the original investment in investee account.

Ex. Investor owns 10% in Investee, Investee pays $10M dividend, Investee has retained earnings of $2.5M

DR Cash $1,000,000

CR Dividend Income $250,000

CR Investment in Investee $750,000

The investor is basically receiving back a portion of the original investment in the investee

F - 5/8/13 81
R - 74, 2/7/14 86
B - 74, 12/6/13 82
A - 70, 11/4/14 89!!!

I'm done 🙂 Many thanks to Jeff, A71 and Roger CPA!!!

MBA and CPA

[Author]

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