USA Equity Method - Dividend Question


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Ok, here is a question that stumped my professor, so I'm hoping someone here might be able to answer it:

Say you are accounting for an investment using the equity method, i.e. you have significant influence over the investee. As per the equity method rules, when the investee reports losses, you reduce the carrying value of your investment. Suppose over the course of a few years, the carrying value of the investment account has been reduced to $0, and total accrued but unrecognized share of investee losses amount to $200,000.

Now, suppose this year they finally turned a profit, in which your share is $50,000. This amount does not cover the accrued losses, so the carrying value of the investment is still $0. Suppose this same year the company also issues a dividend in the amount of $2,000. How do you journalize the dividend? The investment account cannot be reduced beyond $0, but I assume you can't just fail to report the dividend received either.

Question in a nutshell: How do you account for a dividend received from an equity method investee if the carrying amount of the investment is $0?
 
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kirby

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Actually, the acctg rules have a case where the investment acct CAN go negative if the loss is atypical. Weird yes? Special case.

The FASB rules say that if the investment acct gets to zero then you are to STOP using the equity method.
 
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Thank you for your reply. After reading that rule a few times from the Codification, I began to see the answer myself as well. Specifically that discontinuing the equity method would entail posting future dividends as dividend revenue until the unrecognized loss is eliminated. Is thay correct?

Further question: does discontinuing the equity method mean the investor now must make fair value adjustments and recognize unrealized gains/losses at period end as with non equity method securities?
 

kirby

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Thank you for your reply. After reading that rule a few times from the Codification, I began to see the answer myself as well. Specifically that discontinuing the equity method would entail posting future dividends as dividend revenue until the unrecognized loss is eliminated. Is thay correct?
YES

Further question: does discontinuing the equity method mean the investor now must make fair value adjustments and recognize unrealized gains/losses at period end as with non equity method securities?
DISCONTINUING EQUITY METHOD MEANS USE THE COST METHOD.
 
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