Question

Explain the accounting involved at the various levels of stock ownership.

Answer 1

Accounting under various levels of stock holding:

a) Cost Method: where the investment in the investee company is less than 20%, the cost method of accounting is applied. Here stock held is treated as Trading stock. The owned company do not make any entry towards the earning of the Investee company. Any dividend paid by the Investee company is treated as income. Being the marketable securities, the investment in investee should be adjusted to fair market value at the year end.

b) Equity Method: where the investment is within the range from 20% to 50% of the investee’s total issued share capital, it is considered as significant investment and Equity accounting method is used. The owner’s records the proportion of the earnings of the subsidiary in its books and decrease the “Investment in the subsidiary” by the amount of dividend received from the investee company. There is no income effect of the dividend received.

c) Consolidation Method: Where the holding in the investee company is more than 50%, then the consolidation or acquisition accounting method. Here both the company’s financial statement got merged with the adjustment / elimination of inter-company transactions. The adjustment could create the goodwill in the Owner company financial statements.

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