Your Ask Joey ™ Answer

How to record the impact of net income and dividends under an equity method investment?

As the visual below illustrates, net income increases the investment amount on the balance sheet, while dividends decrease the investment (since dividends are paid out of net income / retained earnings).

You must take the total net income and dividends reported by the investee and multiply by the investors ownership % to get the investors share of net income and dividends to recognize. The investment rollforward below illustrates the change in carrying value from recognizing net income and dividends from an equity method investment.

Example: At the beginning of the fiscal year, Boobaloo purchased 25% of Silicon Valley Robotics (SVR). for $550,000. At the end of the fiscal year, SVR reported net income of $65,000 and declared and paid cash dividends of $30,000. SVR uses the equity method of accounting. The balance at the end of the year would be $558,750.


Back To All Questions

You might also be interested in...

  • Three Reasons to Become an Accountant

    If you’re someone who is intrigued by numbers, enjoys problem-solving and wants to help others, then accounting might be the perfect career for you. While some people may be put off by its unalluring reputation, accounting is an excellent career choice that has many benefits. In this article, we look at three of the reasons...

  • Qualified Retirement Planning: Tax Advantages & Disadvantages

    Home Advantages and Disadvantages of Tax-Free and Deferred-Tax Retirement Plans What are “qualified retirement plans” and how can they be effective for tax planning? Well, there are plenty of tax savings advantages to individuals contributing to tax-free retirement accounts, as well as tax-deferred retirement accounts. However, this doesn’t necessarily mean that there are no disadvantages...

  • CPA Evolution Survival Guide

    Download Your eBook by selecting the download icon in the top right-hand corner