Question

Koehn Corporation accounts for its investment in the ordinary shares of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as:_______.a. a reduction of the carrying value of the investmentb. share premiumc. an addition to the carrying value of the investmentd. dividend income

Answer 1

Answer:

A) a reduction of the carrying value of the investment

Explanation:

Under the equity method, the investor company cannot record dividends as revenue, it must record them as a reduction of the carrying value of their investment. Under the equity method, the value of the investment decreases with cash dividends. This transaction involves only a change between assets, investment decreases while cash increases, no additional revenue is recorded.