How is the year-end "investment in investee" calculated under the equity method?

The calculation of the year-end "investment in investee" under the equity method is based on the initial investment amount and subsequently adjusted by the investor’s share of the investee’s earnings and the dividends received from the investee.

The correct approach involves starting with the beginning investment in the investee. From this initial investment, the investor adds their share of the investee’s earnings, reflecting the investor’s proportionate share of the income generated by the investee. This acknowledgment is crucial because the earnings contribute to the overall value of the investment.

Next, any dividends received from the investee are subtracted. Dividends represent a distribution of the investee's earnings back to the investor and reduce the carrying value of the investment since they are considered a return on investment rather than an income-generating addition.

This method captures the economic realities of the equity investment, as it reflects the ongoing performance of the investee and the dividends that affect the total value of the equity investment. Thus, the total year-end investment in the investee is calculated accurately as the beginning investment plus the investor's share of earnings minus the dividends received.