The Cost & Equity Method for the Dividend Income Account

by Jack Ori

Companies sometimes invest in one another. A company that purchases stock from another is called the acquiring company, and the stock it purchases is called equity security. Company accountants keep track of the acquisition of stock and dividends from that stock using either the cost method or the equity method of accounting, depending on how much stock the company acquires.

Cost Method

Use the cost method of accounting if your company acquires less than 20 percent of another company's stock.

List the costs of acquiring the stock as "Equity Investments." List the total acquisition costs as a debit. For example, if your company purchased 50 shares of stock at $20 each and paid a $25 broker's fee, list a debit of $1,025.

Credit cash with the acquisition costs to balance the account. For example, if your company had a debit of $1,025, list a credit to cash of $1,025.

Record dividends as they come in. List dividends as a debit against cash and a credit to "dividend revenue."

Record a debit against cash for the amount your business receives when you sell the stock. For example, if you sell 25 shares of the stock at $22.50 each, list a debit against cash of $562.50. Subtract any brokerage fee from this amount before recording the debit.

Credit equity investments for the original price you paid for the shares. Using the example in Step 2, divide $1,025 by 50 for an original price of $20.50 per share, then multiply that by 25 for a total price of $512.50 for the shares you sold. Thus, credit equity investments for $512.50.

Subtract your credit to equity investments from your debit to cash to determine your gain. In this example, you would have a gain of $50. Record the gain as a credit to equity investments.

Equity Method

Use the equity method of accounting if your company acquires 30 percent or more of another company's stock.

Record the amount your company paid for the stock as a debit against your investment in the other company. Record the same amount as a credit to cash.

Record the total dividends your company receives from the stock as a debit against cash and a credit toward your investment in the other company.

Receive net income from the company whose stock your company acquired. Report your company's share of net income as a debit against your investment in the company and a credit toward your company's revenue from the investment.

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