Question

When applying the rules of the equity method, the equity investments account is credited for the receipt of a cash dividend because?

Answer 1

When applying the rules of the equity method, the equity investments account is credited for the receipt of a cash dividend because the dividend decreases the Investor’s Investment Conclusion.

A business uses the equity method as an accounting approach to record the earnings made by its investment in another business. The investor firm declares the revenue generated by the other company on its income statement using the equity method of accounting, in a proportional amount to the equity stake it has in the other company.

The equity technique recognizes the significant economic connection between the two businesses. On the income statement, the investor denotes their portion of the investee's profits as revenue from investments.

Using the equity method, a company that owns 25% of a company with a $1 million net income would report profits from its $250,000 investment.

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