Question

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the net income of the investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Increase No Effect

Answer 1

Answer:

d. Increase - No Effect

Explanation:

Under the fair value method, cash dividends are considered revenue. E.g. a $10,000 dividend will increase net income by $10,000 - taxes.

Under the equity method, cash dividends are not considered revenue (have no effect on income statement) and instead they decrease the assert account. Investment revenue takes place when the company reports net income for the year.