I. Investments accounted for using the equity method (>20%, <50% investment in another company)

1. Purchase a 25% investment in S Company (for $20,000)

2. Record equity in income of S Company

Assume S Company has income of $10,000 in 1998. We own

0.25 x 10,000 = 2,500.

How does this affect the income statement?

How does this affect the cash flow statement?

3. Receive dividends from S Company

Assume S Company pays $6,000 in dividends in 1998. We receive

0.25 x 6,000 = 1,500

How does this affect the income statement?

How does this affect the cash flow statement?

4. Generally in the operating section of the cash flow statement, companies will show an adjustment for the Excess of income from equity investees over dividends received. In this case, this adjustment would be a 2,500-1,500 = 1,000 subtraction.