Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Dividends Received for Equity Method Investments

Brian Krogol
Was this helpful?
So remember we talked about four journal entries, we're going to see an equity method, we see the purchase, we're gonna see the net income of the invest e then the dividends received, that we're gonna deal with now and finally the sale of the asset. So let's deal with the dividends received here. So when we receive dividends, this is almost like a reduction of our retained earnings in our investment. Okay, So we're gonna have this investment account and we're receiving part of that investment back there saying, hey, here's some of the money that you have from your investment from the earnings that we've made. So remember we've been putting that net income from the investment, we've been putting it into the investment account. Now we're receiving some of that money from the investing. So we're going to reduce that investment account. So this is very different than from the cost method where we did trading securities and available for sale securities, right? We we were taking dividend revenue, never do that with the equity method. That's gonna be totally wrong. We don't have dividend revenue with the equity method, we just reduced the investment. So it says January Year three small boy company declared and paid dividends of 420,000. So guess how much dividends we're gonna receive, we're gonna receive 40% of that, right? We receive 40% of the total dividends they pay. So if we do 4,420,000 times 400.4, it comes out to 100 and 68,000. Okay, so notice how often we're using that 40% ownership. It comes up in all our journal entries after our cost, right? We're using it to to value the net income that we receive and the dividends is going to be at that 40%. Cool. So you you're gonna be you really have to figure out that percentage and keep track of it. So we're gonna receive 100 and 68,000 in dividends. So we're gonna receive cash, right, This is going to be cash that we received of 100 and 68,000. But what's gonna be the credit? Remember we reduced the investment, We don't take dividend revenue, we reduce the investment by the cash we receive 168,000. This is almost like a payout of our investment that we've put in. Okay, so 100 68,000 is going to be the reduction of the investment. We have cash received of 100 and 68,000 and the investment is decreasing by 100 and 68,000. So our assets stay the same there because we're decreasing the investment by the amount. Alright, so as you see these journal entries, as you do more and more examples of equity method, you're gonna see that it's always the same. You just got to keep track of your percentage and these journal entries always look the same. Cool, let's go ahead and move on to the next journalist