Equity method and dividends rec'd...confused

Sunshine4ever

2010 Schweser Practice - Book 1 Exam 1 PM #74

I'm confused here.

Here is part of the answer key. Midland is an associate and we use equity method to report :

Since Iberia owns 40% of Midland (5 million shares owned I 12.5 million total shares
outstanding), the equity method is used. Under the equity method, Iberia reports its
pro-rata share of Midland's net income (€5 million loss x 40% = €2 million loss).
Changes in market value are ignored under the equity method.


** My concern is with Midland. Our share of the 5million loss is 2 million, which I report on the I/S. Midland also paid out $4 million in dividends in the year. Our share of that dividend is 1.6 million, which will end up in cash.

Should I not be reporting the 1.6 dividend received AND the 2 million loss on the income statement?

In the answer key, they ignore the dividend received and only report the portion of the net loss to the I/S.

WHAT AM I MISSING?!?

b_sea93

The dividend should not reported on the income statement. It should increase/decrease the "Investment" account on the balance sheet according to the equity method.

kkn006

Nevermind, I need more Red Bull.

Figured out that you don't report dividends on equity method, since they are taken away from the investment account already.

Disregard.

huangxiaoxie

beingthatguy, thanks. Temporary lapse of intelligence.

Thanks for the quick reply!

Cheers

Houjichasan

What is the question asking exactly? under the equity method you just report a your pro-rata share of income/loss on one line. Dividends are not reported under the same line.

jacksparrow

The question asks for what effect the whole thing will have on the I/S.

I originally thought that I had to report the dividend received on top of the allocation of profit/loss to the investment account...