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CHAPTER 2
Stocks Investments – Investor Accounting and Reporting
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Basic methods of accounting for common stock investments :
1
...

Dividends received in excess of the investor’s share of earnings after the stock is
acquired are considered a return of capital (liquidating dividend) and recorded as
reduction in the investment account
...
Trading securities  bought and held principally for resale purpose in the
near term, valued using fair value, includes unrealized gains and losses in
net income
b
...

2
...

Record investment at cost (equal to fair value at the acquisition date) and asjust for
earnings, losses, and dividends
...

Dividends received from investees are disinvestments under equity method (decrease
investment account)
Investment income  investor’s share of the net income of the investee
Investment account  investor’s share of the investee’s net assets

Levels of Influence
<20% presumes lack of significant influence  fair value (cost) method
20% to 50% presumes significant influence  equity method
>50% presumes control  consolidated financial statements

By: Anita Eva Erdina

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Accounting for Investment

Degree of
influence

Investment's carrying
value

Investment
income

Lack of
significant
influence

Fair value (cost, if
nonmarketable)

Dividends declared

Significant
influence

Original cost adjusted to
reflect periodic earnings and
dividends, e
...
, a
proportionate share of
investee's net assets

Proportionate
share of investee's
periodic earnings*

FAIR VALUE (COST) METHOD vs EQUITY METHOD
Pal Corporation acquires 2,000 of the 10,000 outstanding shares of Sid Corporation (1/5 or
20% ownership) at $25 per share on July 1
...
Further, tha cash paid equals 20% of the fair value of Sid’s
net assets
...
If there is evidence of an inability to exercise significant
influence, Pal Should apply the fair value/cost method revaluing the investment account to
fair market value at the end of the accounting period
...
Accounting by Pal under the two methods is as follows:
Fair value (cost) method
Equity method
Entry on July 1 to record the Investment
Investment in Sid (+A)
50,000
Investment in Sid (+A)
50,000
Cash (-A)
50,000
Cash (-A)
Entry on November 1 to record the dividends
Cash (+A)
2,000
Cash (+A)
2,000
Dividends Income (-A)
2,000
Investment in Sid (-A)
Entry on December 31 to recognize earnings
None (assume the stock is either Investment in Sid (+A)
2,500
nonmarketable or has a market price =$25
Income from Sid (R, +SE)
per share so that no revaluing is needed

50,000
2,000
2,500

*under fair value method Pal recognizes income of $2,000 and reports its investment in Sid at
its $50,000 cost at December 31
...

Summary of Pal’s equity under equity method:
July 1
Nov 1
Dec 31
Dec 31

Initial cost
Dividends received
Recognize 20% of Sid’d net income for ½ year
Ending Balance

$50,000
(2,000)
(2,500)
$50,500

An exception arises when dividends received exceed the investor’s share of earnings after the
investment has been acquired  return capital or liq

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