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.
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