Answer (A) is correct. Under the fair value method and the cost method, (used only if the fair value method and the equity method are not applicable), dividends from an investee should be accounted for by the investor as dividend income
unless a liquidating dividend is received. Thus, assuming that the
dividend is not liquidating, it has no effect on the investment account
under the fair value method. Under the equity method, the investor
recognizes its equity in the undistributed earnings of the investee.
Consequently, cash dividends decrease the investment account because
the dividend is considered to be a return of investment.