Cash dividends declared out of current earnings are distributed to an investor. How will the investor's investment account be affected by those dividends under each of the following accounting methods? $\begin{array}{l}
\begin{array}{|c|c|c|}
\hline&\text { Cost Method }&\text { Equity method }\
\hline 1&\text { No effect } & \text { No effect } \
\hline 2&\text { No effect } & \text { Decrease } \
\hline 3&\text { Decrease } & \text { No effect } \
\hline 4&\text { Decrease } & \text { Decrease } \
\hline
\end{array}
\end{array}$

Question

Quizplus · Accepted Answer

Under the cost method, dividends received are considered a return on investment and do not affect the investment account's carrying amount, hence no effect. Under the equity method, dividends received are considered a return of investment, reducing the carrying amount of the investment, hence a decrease.

Cash Dividends Declared Out of Current Earnings Are Distributed to an Investor