click to edit master title style 1 1 1 investments in stocks 14
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Investments in Investments in StocksStocks
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Accounting for Investments in Stocks
Like individuals, businesses have a variety of reasons for investing in stocks, called
equity securities. A business may purchase stocks as a means of earning a
return on excess cash that it does not need for its normal operations.
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Trading securities are securities that management intends to actively trade for profit.
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Available-for-sale securities are securities that management expects to sell in the future, but which are not actively traded for profit.
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When a business invests in available-for-sale securities,
such investments are classified as temporary investments or
marketable securities.
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Marketable securities must meet two conditions:1. The securities must be readily
marketable, and can be sold for cash at any time.
2. Management must intend to sell the securities when the business needs cash for operations.
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On June 1, Crabtree Company purchased 2,000 shares of Inis Corporation common stock at $89.75 per share plus a brokerage fee of $500. The firm paid $180,000 [($89.75 x 2,000 shares) + $500].
June 1 Marketable Securities 180 000 00
Purchased 2,000 shares of Inis
Corporation common stock.
Cash 180 000 00
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Nov 30 Cash 1 800 00
Received dividends on Inis
Corporation common stock
(2,000 shares x $0.90).
Dividend Revenue 1 800 00
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On October 1, Inis declared a $0.90 per share dividend payable on November 30.
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On the balance sheet, temporary investments are reported at their fair
market value. Any difference between the fair market value and their cost is an
unrealized holding gain or loss.
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Unrealized Holdings Gain or Loss
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UnrealizedCommon Stock Cost Market Gain (Loss)
Edwards Inc. $150,000 $190,000 $40,000SWS Corp. 200,000 200,000 —Inis Corporation 180,000 210,000 30,000Bass Co. 160,000 150,000 (10,000) Total $690,000 $750,000 $60,000
The Crabtree Co.’s portfolio of temporary investments was purchased during 2008 and has the following fair market values and unrealized gains and losses on December 31, 2008.
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Temporary Investments on the Balance Sheet
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Long-term investments are not intended as a source of cash in the normal operations of the
business. Rather, such investments are often held for their income, long-term gain potential, or influence over
another business entity.
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Long-Term Investments in Stocks
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Account for the investment by using the equity method
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Accounting for Long-Term Stock Investments
Is there a significant influence over the investee?
No Yes
Account for the investment as an available-for-sale
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Jan. 2 Investment in Brock Corp. Stock 350 000 00
Purchased 40% of Brock
Corp. common stock.
Cash 350 000 00
On January 2, Hally Inc. pays cash of $350,000 for 40% of the common stock and
net assets of Brock Corporation.
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Dec. 31 Investment in Brock Corp. Stock 42 000 00
Recorded 40% share of Brock
Corp. net income of $105,000.
Income of Brock Corp.42 000 00
For the year ending December 31, Brock Corporation reports net income of $105,000.
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Dec. 31 Cash 18 000 00
Recorded 40% share of
Brock Corp. dividends.
Investment in Brock Corp.Stock18 000 00
On December 31, Brock Corporation pays $45,000 in dividends.
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Investments and Dividends
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Mar. 1 Cash 17 500 00Investment in Drey Inc. Stock15 700 00
Gain on Sale of Investments1 800 00
Sale of Investments in Stocks
On March 1, an investment in Drey Inc. stock that had a carrying amount of
$15,700 is sold for $17,500.
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Example Exercise 14-6
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Phillips Company purchased 30% of the outstanding stock of Singh Company on January 1, 2008. Singh reported net income of $90,000 and declared dividends of $15,000 during 2008. How much would Phillips adjust their investment in Singh Company under the equity method?
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