University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

246

Pages:

2
Author:

stud_ice13

Accounting for Equity Securities with Insignificant Influence When an investor owns less than 20% of the voting stock in another company, it is assumed they have insignificant influence over that company. The stock investment is reported at fair value, with gains or losses from fair value adjustments recorded on the income statement. Dividends received are recorded as dividend revenue. Steps and Journal Entries for Equity Securities with Insignificant Influence 1. Recording the Purchase of Stock Investments • • • Transaction: Derr Co. purchases stock investments for $250 on December 15. Journal Entry: o Debit: Stock Investments $250 o Credit: Cash $250 Explanation: This entry records the initial acquisition cost, including any transaction fees. The stock is reported as a short- or long-term investment depending on management's intent and marketability. 2. Recording Dividend Revenue • • • Transaction: Derr Co. receives a $15 cash dividend on December 28. Journal Entry: o Debit: Cash $15 o Credit: Dividend Revenue $15 Explanation: Dividend revenue is recognized when dividends are received, reflecting income from holding the investment. 3. Recording Year-End Fair Value Adjustment • • • Transaction: At year-end December 31, the fair value of the stock investments is $200, compared to their cost of $250. This results in a $50 unrealized loss. Journal Entry: o Debit: Unrealized Loss—Income $50 o Credit: Fair Value Adjustment—Stock $50 Explanation: The fair value adjustment aligns the carrying amount of the investment with its fair value on the balance sheet. This loss is recognized in the income statement in the "Other Expenses and Losses" section. 4. Financial Statement Reporting for Year-End Fair Value Adjustment • • Fair Value Adjustment—Stock: This contra asset account is shown in the balance sheet, reducing the Stock Investments account by $50 to reflect the fair value of $200. Unrealized Loss—Income: This temporary account is reported in the income statement under "Other Expenses and Losses." It is closed to Income Summary at year-end. 5. Recording the Sale of Stock Investments • • • Transaction: On January 3, Derr Co. sells a portion of its stock investments (original cost $37) for $40. Journal Entry: o Debit: Cash $40 o Credit: Stock Investments $37 o Credit: Gain on Sale of Investments $3 Explanation: The gain of $3 is recorded under "Other Revenues and Gains" in the income statement, representing the difference between the sale price and the original cost of the stocks sold. Summary • • • Initial Purchases and Dividends: Recorded at cost, with dividends recognized as income when received. Fair Value Adjustments: Made at year-end to reflect changes in market value, affecting the income statement and the balance sheet. Sales of Investments: Gains or losses are recognized based on the difference between the sale proceeds and the cost, independent of prior fair value adjustments.