Question

explain how ownership and control can influence the accounting for investments in common stock.

Answer 1

Accounting for investments in common stock varies by the percentage of ownership and the level of influence the owner on the decision making activities of the business. If the ownership is less than 20%, the investor has little influence on the company and it is considered as a passive investment. The investments are accounted for in the investors books at fair value and the values are adjusted for with the changes in the fair value of the assets. The investment is classified into held for sale, held to maturity or held for trading depending on the investors intention with the securities. If the ownership is between 20% to 50% , the investor is considered to have significant influence and the investment is accounted for using the equity method. These are considered as minority active investments or equity investments. The share of the income from the investee is shown as investment income in the financial statements. Also, the dividends received are reduced from the investment account in the balance sheet. If the ownership is more than 50%, they are considered as majority active investments and the investor is able to have effective control over the investee. Consolidation of accounts i.e. combining the financial statements of both the investor and investee in done under this ownership pattern and any inter company transactions are eliminated.