Question

Under the cost method, dividends declared by a subsidiary are accounted for by the parent as: Select one: A. Dividend income. B. Decrease in Equity Investment. C. Increase in Equity Income. D. Decrease in Equity Investment, but only if it is a liquidating dividend.

Answer 1

Answer:

B. Decrease in Equity Investment

Explanation:

As we know that

At the time of payment of dividend it reduces the cash balance plus we debited the dividend payable.

The journal entry is also shown for better understanding

Dividend payable A/c $122,838

          To Cash A/c $122,838

(Being the dividend is paid)

So as per the cost method, the dividend declared by a subsidiary reduced the equity investment

Therefore, the second option is correct