Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to
A) Investment in Vallerio Corporation Stock
B) Retained Earnings
C) Dividend Revenue
D) Dividend Receivables

Question

Quizplus · Accepted Answer

Under the equity method, the receipt of cash dividends is considered a return on the investment rather than income. Therefore, it reduces the carrying amount of the investment in Vallerio Corporation Stock. This is because the dividends are assumed to be paid out of the earnings that have already been recognized in the investor's income, and thus, they reduce the investment balance rather than being recognized as dividend income.

Under the Equity Method, the Receipt of Cash Dividends on an Investment