ACCOUNTING FOR INVESTMENTS

First one has to ascertain what kind of an investment it is. If it is an investment in another company where the owner or partial owner has significant influence over the financing, operating and investing activities of the investment company, then the income, loss and dividends of the investment are affecting the investment account and creating either a loss or gain on the Income Statement.

 

SIGNIFICANT INFLUENCE (The Equity Method)

Journal Entries:

 

Cash. . . . . . . . . . . . . . . . . . XXXXX

    Investment in ABC Co. . . . . . . . . . . . . . . . . . XXXXX

to record the purchase of shares in the subsidiary company and the part-owner has significant influence.

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Cash. . . . . . . . . . . . . . . . . . XXXXX

    Investment in ABC Co. . . . . . . . . . . . . . . . . . XXXXX

To record a distribution of dividends.

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Loss from Discontinued Operations. . .. . . . . . . . . . . . XXXXX

    Investment in ABC Co. . . . . . . . . . . . . . . . . . XXXXX

To record a distribution of dividends and reduction of the investment.

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Investment in ABC Co. . . . . . . . . . . .. . . . . . . . . . . . XXXXX

    Investment Income. . . . . . . . . . . . . . . . . . XXXXX

To record income earned by the subsidiary.

 

Other differences in journal entries when using equity instead of the cost method, would be the entry to show if there was a loss or gain upon purchase. If purchase price less price of net assets shows (-), record a loss (also recorded on the Income Statement as an Ordinary Loss). 

 

 

 

NO SIGNIFICANT INFLUENCE (The Cost Method)

Cash. . . . . . . . . . . .. . . . . . . . . . . . XXXXX

    Investment Income. . . . . . . . . . . . . . . . . . XXXXX

To record income earned by the subsidiary, for which no change is noted to the owner's investment account.