WEEK 13. Long-Term Stock Investments Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100%

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Presentation transcript:

WEEK 13

Long-Term Stock Investments Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100% 20% 20% 0% 0% 50% 50%

Long-Term Stock Investments Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100% 20% 20% 0% 0% 50% 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.

Long-Term Stock Investments Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100% 20% 20% 0% 0% 50% 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 Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100% 20% 20% 0% 0% 50% 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.

Long-Term Stock Investments Equity Method Cost Method Not significant influence Significant influence Ownership % Controlling Interest 100% 100% 20% 20% 0% 0% 50% 50%

DateDescriptionDebitCredit DateDescriptionDebitCredit Cost Method Investment in Stock5,940 Cash5,940 Cash200 Dividend Revenue200 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.

DateDescriptionDebitCredit DateDescriptionDebitCredit Equity Method Investment in Brock Corp. Stock350,000 Cash 350,000 Investment in Brock Corp. Stock 42,000 Income of Brock Corp.42,000 Cash18,000 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

DateDescriptionDebitCredit DateDescriptionDebitCredit Sale of Long-Term Stock Investment Cash17,500 Investment in Stock15,700 Gain on Sale of Investments1,800 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.