Liquidating dividend from an investee
However, the parent can not ignore the sub's losses; Parent writes-down investment only if value has been impaired; Write-downs result in a NEW cost basis The cost method can be written down -- but never written up Used when the investor lacks the ability either to control or to exercise significant influence over the investee Accounting procedures: The cost method is consistent with the treatment normally accorded non-current assets At the time of purchase, the investor records its investment in common stock at the total cost incurred in making the purchase The investment continues to be carried at its original cost until the time of sale Income from the investment is recognized as dividends are declared by the investee Recognition of investment income before a dividend declaration is inappropriate ABC Company acquires 20 percent of XYZ Company’s common stock for 0,000 at the beginning of the year but does not gain significant influence over XYZ.
During the year, XYZ has net income of ,000 and pays dividends of ,000.
This mainly occurs during voluntary liquidations of solvent corporations.
The term cost method refers to an accounting approach used when an investor has passive interest in another company.
For example, the investee might declare a liquidating dividend.
However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.The equity method assumes that the investor has some control over the actions of the investee.