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The Cost Method
When holding less than 20% of a company's stock, the investor only accounts for the purchase and sale of the investment, as well as any dividends received. This method is used for non-strategic investments.
Recording the Acquisition
- Includes all costs related to acquisition
- Example: Price of shares, brokerage fees, commissions
Recording Dividends
- Recorded asrevenue
- No adjustments are needed for timing because dividends do not accrue like interest.
Recording Sale
- Record net proceeds from sale
- Sale price less any selling expenses like brokerage fees and commissions
- Recognize gain or loss on sale
- Difference betweenproceeds from saleandacquisition cost
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Example: Cost Method
Karlini Company had the following transactions pertaining to stock investments, prepare the journal entries to record these transactions:
Feb 13: Purchased 4,000 of the 80,000 outstanding common shares of Aquablu Inc.'s stock for $11 per share and paid 2% in brokerage fees.
Aug 23: Received cash dividend of $1.50 per share on Aquablu's stock.
Sep 12: Sold 4,000 shares for $13 per share and paid 2% brokerage fees.
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Example: Cost Method
On July 1st, Carleton Co. purchased 1,000 shares of Williams Company for $40 per share plus $500 in commission fees. The investee has 200,000 outstanding common shares. On August 5th, Williams Company pays a $3 per share cash dividend. On September 13th, Carleton Co. sells 400 shares of Williams Company for $28 per share and pays $600 in commission fees. On October 17th, Williams Company pays a $3.10 per share cash dividend.
Prepare all necessary journal entries from the point of view of the investor.
Purchase of Williams Company shares:
Collection of cash dividend from Williams Company on August 5th:
Sale of 400 shares of Williams Company:
Collection of cash dividend from Williams Company on October 17th:
Practice: Cost Method
Ethan Company had the following transactions in the month of April:
- Apr 4: Purchased 500 shares (2% of total shares) in Noah Corp for $35 per share plus 5% in brokerage fees.
- Apr 8: Received a $2.40 per share cash dividend from Noah Corp.
- Apr 18: Sold 500 shares in Noah Corp for $20 per share and paid $500 in brokerage fees.
Prepare the journal entries to record the transactions described above.
April 4
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Cost Method
On March 18th, 2020 Moran Inc. purchased 10% of Libby Co.'s 200,000 shares for $60,000 plus $1,000 in brokerage fees. Libby Co. paid a $0.40 per share cash dividend on April 21st. Moran Inc sold 4,000 shares of Libby Co. on June 12th for $8 per share and paid $400 in brokerage fees.
Prepare all necessary journal entries for Moran Inc.
March 18
Transactions:
| Account | Debit | Credit |
|---|---|---|