Forest Ltd. reports its investment in Leeds Co. on an equity basis. During the year, Forest received $10,000 in dividends from Leeds. How should Forest report these dividends?

Question

Quizplus · Accepted Answer

When a company uses the equity method to account for investments, dividends received from the investee (in this case, Leeds Co.) are considered a return on investment and thus reduce the carrying amount of the investment on the investor's (Forest Ltd.) statement of financial position. This is because the investor's share of the investee's profits, from which dividends are typically paid, has already been recognized in the investor's income, increasing the investment balance. Dividends are then treated as a return of some of that investment, not as income.