Accounting For Equity Investments

Intermidiate Accounting
COMM-104
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Assalam o Alikum
Presented by:
Muhammad Sajjad
Roll No: 19021554-033
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Table of Content
• Equity Investment
• Accounting for Equity Investment
• Holding less than 20% Stock
• Holding 20-50% Stock
• Holding 50% Stock
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Equity Investments
• Equity investment is money that is invested in a company by
purchasing its shares.
• It happens when a company wants to get control or influence
another company.
• One of the main reasons behind inter-corporate investments
is that companies want to reduce or eliminate risk of their
own business i.e. a company that is involved in steel
production can invest in Iron Extraction to avoid raw
material price soaring.
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Accounting For Equity Investments

• The accounting for investments in common stock depends
on the extent of the investor’s influence over the operating
and financial affairs of the issuing corporation.
• Holding Less than 20% Stock: Investor acquires < 20% of
investee`s voting stock which means insignificant influence.
• Holding 20-50% Stock: Investor acquires 20-50% of
investee`s voting rights which makes him a significant
influence.
• Holding 50% Stock: Investor acquires > 50% of Voting
stock which gives him legal control over the investee.
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Less than 20% Stock Investment

• If a company owns less than 20% of another company, it`ll
have insignificant influence over the investee.
• According to GAAP Cost Method should be used for
accounting in such case.
• In Cost Method companies record the investment at its cost
and revenue is received only when dividend is received.
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Accounting Treatment
• Recording Purchase of stock:
The stock investment is recorded at cost. Cost involves all the
expenses that were paid by the Company to acquire the stock.
J.E Stock Investments (Dr.)
Cash (Cr.)
• Recording Revenue (Dividend)

Revenue is recorded when the cash dividend is received.
J.E Cash (Dr.)
Dividend Revenue (Cr.)
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• Recording Sale of Stock
When a company sells the investment stock, it may recognize
gain or loss from the sale proceeds. Such gains are recorded in
income statement under the “Other Revenues and Gains”
section. Whereas, Losses are recorded under the “Other
Expenses and Losses” section of the income statement.
J.E in case Cash (Dr.)
of gain: Stock Investments (Cr.)
Gain on Sale of Stock Investments (Cr.)

of loss: Loss on Sale of Stock Investments (Dr.)
Stock Investments (Cr.)
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20-50% Stock Investment

• If a company owns 20-50% stock of another company, it`ll
have significant influence over the other company.
• According to GAAP, Equity Method should be used for
accounting of such companies.
• In Equity method, company initially records its part of the
net income in the stock investment account and then they
transfer it to Cash account after receiving the cash dividend.
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Accounting Treatment
• Recording Purchase of Stock:
The stock investment is recorded at cost. Cost involves all the
expenses that were paid by the Company to acquire the stock.
Stock Investments (Dr.)
J.E Cash (Cr.)
• Recording Revenue (Dividend):
It is recorded as explained in the previous slide
J.E for Stock Investments (Dr.)
Revenue Revenue from Stock Investments(Cr.)
J.E for Cash (Dr.)

Dividend Stock Investments(Cr.)
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• Recording Sale of Stock
When a company sells the investment stock, it may recognize
gain or loss from the sale proceeds. Such gains are recorded in
income statement under the “Other Revenues and Gains”
section. Whereas, Losses are recorded under the “Other
Expenses and Losses” section of the income statement.
of gain: Stock Investments (Cr.)
Gain on Sale of Stock Investments (Cr.)

of loss: Loss on Sale of Stock Investments (Dr.)
Stock Investments (Cr.)
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50% Stock Investment

• If a company owns 50% shares of another company, they`ll
have control over the other company.
• According to GAAP, such companies should prepare
consolidated financial statements.
• Consolidated financial statements reports financial
statements of all divisions or subsidiaries as one entity
structured with a parent company.
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Accounting For Equity Investments

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Intermidiate Accounting

Accounting For Equity Investments

Less than 20% Stock Investment

• Recording Revenue (Dividend)

J.E in case Cash (Dr.)

20-50% Stock Investment

J.E for Cash (Dr.)

J.E in case Cash (Dr.)

50% Stock Investment

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