Asked by Oscar Cerna on Jul 28, 2024
Verified
Under the equity method, a receipt of cash dividends by the investor would
A) increase total assets and stockholders' equity
B) increase total assets and liabilities
C) decrease the investment account
D) increase the investment account
Equity Method
The equity method is an accounting technique used to record investments in other companies, typically reflecting the owning company's fair share of the investee's net income.
Cash Dividends
Payments made by a corporation to its shareholders, usually as a distribution of profits.
Investment Account
An account held at a financial institution that is used to hold securities, cash, and other investments in the financial markets.
- Understand the accounting procedures for dividends received according to the equity method.
Verified Answer
KG
Keshav GuptaJul 29, 2024
Final Answer :
C
Explanation :
The equity method involves reporting the investor's share of the investee's net income or loss as an increase or decrease to the investment account, rather than as dividend income. Therefore, receipt of cash dividends by the investor decreases the investment account, as it represents a return of a portion of the initial investment. This transaction does not impact total assets or liabilities in any way, and it does not directly impact stockholders' equity unless the investor chooses to recognize the decrease in the investment account as a realized gain or loss on the income statement.
Learning Objectives
- Understand the accounting procedures for dividends received according to the equity method.