Passive Cash Dividend Received
Pine Company received a cash dividend from Wood Corporation. What is the impact on the balance sheet investment account of Pine if the investment is considered passive?
a. No effect.
b. Increase.
c. Decrease.
Related: Marketable investments reported on the balance sheet at fair value
Solution
The impact on the balance sheet investment account would be a. No effect.
Solution Explanation
Under the equity method, dividends or other distributions received from the investee are treated as a return of capital and reduce the carrying amount of the investment, but are not reported in the investor’s profit or loss.
However, if an equity investment is measured at FVOCI, only the dividend income is recognized in profit or loss.
If the investment is not accounted for using the equity method, dividends received would increase cash and either be recognized as income (if measured at FVPL or FVOCI) or reduce the carrying value of the investment.