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ACCOUNTING FOR INVESTMENT IN STOCKS
WEEK 13
Long-Term Stock Investments
EquityMethod
CostMethod
Not significantinfluence
Significantinfluence
Ownership %
Controlling Interest
100%
20%
0%
50%
Long-Term Stock Investments
EquityMethod
CostMethod
Not significantinfluence
Significantinfluence
Ownership %
Controlling Interest
100%
20%
0%
50%With less than 20% ownership the buyer does not usually have significant influence. The buyer uses the cost method to account for the investment.
With less than 20% ownership the buyer does not usually have significant influence. The buyer uses the cost method to account for the investment.
Long-Term Stock Investments
EquityMethod
CostMethod
Not significantinfluence
Significantinfluence
Ownership %
Controlling Interest
100%
20%
0%
50%
Ownership over 20% usually indicates significant influence.The buyer uses the equity method to account for the investment.
Ownership over 20% usually indicates significant influence.The buyer uses the equity method to account for the investment.
Long-Term Stock Investments
EquityMethod
CostMethod
Not significantinfluence
Significantinfluence
Ownership %
Controlling Interest
100%
20%
0%
50%
The corporation owning all or a majority of the voting stock is called the parent company. The controlled corporation is the subsidiary company. Consolidated financial statements are prepared which combinine the operating results of the two entities.
The corporation owning all or a majority of the voting stock is called the parent company. The controlled corporation is the subsidiary company. Consolidated financial statements are prepared which combinine the operating results of the two entities.
Long-Term Stock Investments
EquityMethod
CostMethod
Not significantinfluence
Significantinfluence
Ownership %
Controlling Interest
100%
20%
0%
50%
Date Description Debit Credit
Cost Method
Investment in Stock 5,940Cash 5,940
Cash 200Dividend Revenue 200
Mar. 1
Purchased 100 shares of Compton Corp. stock at 59 plus brokerage fee of $40.
Received $2 cash dividend from Compton Corp.
Dec. 31
The cost method is used when the buyer does not have significant influence over the operating and financing activities of the investee.
Date Description Debit Credit
Equity Method
Investment in Brock Corp. Stock 350,000Cash 350,000
Investment in Brock Corp. Stock 42,000Income of Brock Corp. 42,000
Cash 18,000 Investment in Brock Corp. Stock 18,000
Jan. 2
Purchased 40% of Brock Corporation for $350,000.
Brock Corporation reports net income of $105,000.
Dec. 31
Brock Corporation reports total dividends of $45,000.
Dec. 31
Date Description Debit Credit
Sale of Long-Term Stock Investment
Cash 17,500Investment in Stock 15,700Gain on Sale of Investments
1,800
Mar. 1
Sold stock of Drey Inc. for $17,500.Stock has a carrying value of $15,700.
When shares of stock are sold, the investment account is credited for the carrying value (book value) of the shares sold.
