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Accounting For
Investment in Stock
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Accounting for Investments in Stocks 14-5

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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nEquity securities represent ownership

interests such as common, preferred, or other
capital stock.
nThe cost of equity securities includes the
purchase price of the security plus brokers
commissions and other fees incidental to the
purchase.

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Accounting treatment of equity

securities depends on
ownership percentage and
nature of the security

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Ownership Percentage

1. Holdings of less than 20 percent (fair value method)investor has

passive interest.
2. Holdings between 20 percent and 50 percent (equity method)
investor has signifcant influence.
3. Holdings of more than 50 percent (consolidated statements)
investor has controlling interest.

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Nature of Security

Trading securities are securities that

management intends to actively trade for
profit.
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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Ownership & Nature

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Ownership & Nature:

Less than 20%

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+ Less Than 20% Ownership: FV Method 9

AFS Trading Securities

Purchase (include brokerage): Purchase (include brokerage):

AFS Securities Trading Securities

Cash Cash

Dividend receipt: Dividend receipt:

Cash Cash

Dividend Revenue: Dividend Revenue:

Sale: Sale:

Cash Cash

AFS Securities Trading Securities

Gain on Sale of Investment Gain on Sale of Investment

Net income report: Net income report:

No entry No entry

FV adjustment FV adjustment
9
Securities Fair Value Adj - AFS Securities Fair Value Adj Trading Securities
Unrealized Gain or Loss on AFS - Equity Unrealized Gain or Loss on AFS - Income
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+ More Than 20% Ownership: Equity Method 10

Purchase

Investment in PT Telkom Stock

Cash

Dividend receipt:

Cash

Investment in PT Telkom Stock

Sale:

Cash

Investment in PT Telkom Stock

Gain on Sale of Investment

Net income report:

Investment in PT Telkom Stock

Income from PT Telkom Stock

10
FV adjustment
no entry
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+ 11

FV method vs. Equity Method

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