How to Account for Investments in Common Stocks

An old accounting method

When businesses purchase common stock, it is important that they note the percentage of issued stock purchased. The percentage of stock purchased determines the correct accounting method. Generally, if a business purchases between 0 percent and 20 percent of stock, then the business accounts for the investment with the cost method. Purchasing between 20 percent and 50 percent uses the equity method. Purchasing over 50 percent use the acquisition method.

Instructions

1. Debit investment in investee, and then credit cash at the cost for the investment when the company purchases less than 20 percent of another company's common stock. At the end of each year, adjust the investment to fair value by debiting unrealized holding losses and crediting investment in investee, or debiting investment in investee and crediting unrealized holding gains.

2. Debit investment in investee, and then credit cash at the cost of the investment when the company purchases between 20 percent and 50 percent of another company's common stock. Earnings from the investment increases the investment in investee account, and dividends from the investment decreases the investment in investee account.

3. Debit investment in subsidiary and credit cash when a company owns more than 50 percent of the common stock of another company. If the company acquires another company's stock without cash but uses stock instead, then debit investment in subsidiary and credit stock and additional paid in capital.

References

• Principals of Accounting: Chapter 9
• AccountingInfo: Cost Method