Liquidating dividend from an investee

The equity method assumes that the investor has some control over the actions of the investee.

The cost method is generally followed for investments in noncontrolled corporations and unconsolidated subsidiaries.

The investor may even formally agree to give up voting rights on the investee stock to assert that it lacks influence.

Corporations distribute dividends from the equity account called retained earnings, which records the accumulated profits of the company.

Corporations also can receive dividends by owning dividend-paying stock of other corporations.

The accounting method an investor corporation uses to record dividends received from an investee -- the business in which it has invested -- depends on how much investee stock the investor owns.

However, the investor may avoid the equity method if it can prove to the satisfaction of the Internal Revenue Service that such control is an illusion.

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