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Your Corporation buys 5,000 of ABC's 20,000 outstanding shares at $10 each, using the equity method. ABC pays a $5,000 dividend. How is the dividend recorded by the investor?
ACredit Dividends Revenue $5,000
BDebit Investment in ABC Stock $5,000
CNo entry is required for the dividend
DCredit Investment in ABC Stock $5,000
Answer & Solution
Correct answer: D. Credit Investment in ABC Stock $5,000
1. Under the equity method, dividends received are treated as a return of the investment, not as revenue.
2. The investor debits Cash $5,000 and credits Investment in ABC Stock $5,000.
3. Crediting the investment account reduces its carrying amount.
4. Option A is the fair value through net income treatment; the equity method does not use Dividends Revenue.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.2 "Receive Dividend Payments", p.184_
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