Drabble, Inc. owns 40 percent of the outstanding stock of Gilliam Company. During 2014, Drabble received a $4,000 cash dividend from Gilliam. What effect did this have on Drabble's 2014 financial statements? (Assume that Drabble has substantial influence over Gilliam )

Question

Quizplus · Accepted Answer

When a company like Drabble, which has significant influence over another company (Gilliam, in this case), receives a dividend, it is considered a return on investment. Therefore, the dividend received decreases the investment account on Drabble's balance sheet, reflecting that part of the value of the investment has been returned to Drabble in cash. This does not directly increase income because under the equity method, the investor recognizes its share of the investee's income, not dividends received, as income.