Question

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it accounts for the investment as held-for-trading or uses the equity method of accounting?

Answer 1

Answer:

No, the investment is not increased in any accounting method so it must not be increased.

Explanation:

The reason is that in the cost method, the investment remains the same because the return is treated as income.

In the held for trading, the return received is treated as decrease in the investment because the dividend received decreases the fair value of the investment. Similarly in the equity method the dividend received is treated as cash withdrawal or we can say that dividend received decreases the fair value of the investment.