Question

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?

Short answer

Distribution of dividends to investors leads reduction in the equity investment account.

Step-by-step solution

Definition of investment account

The investment account is an account that keeps a record of all types of securities.

Accounting treatment

The investment account is affected by the earnings and losses of the investee account. Whenever the investors receive their dividend, the investment account is reduced by the dividend amount. Hence, this transaction reduces the balance of the investment account.