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Liquidating dividend accounting entry
Before I begin with my topic of the day, I wanted to share an interesting article on Investing in Gold.
With sudden rise in price of Gold, it seems, everyone's getting more passionate about buying yellow metal.
Then I landed on this article in Money magazine " Coming down with Gold fever" and I had to ask myself... The truth is Gold prices may rise further but this is not the right time to invest in it.
Now coming back to today’s subject for dialogue “Accounting for Investments-Equity Method” laid out in Codification Topic 323 (APB Opinion No 18).
This method is applicable if an investment enables the investor/parent to influence the operating or financial decisions of the investee/subsidiary.
In other words, the parent company exercises significant influence over the subsidiary and holds 20% or more of the voting stock in it.
Furthermore, the equity method of accounting meets the objectives of accrual accounting than does the cost method.
The cost method is generally followed for investments in noncontrolled corporations and unconsolidated subsidiaries.
Upon acquisition, the initial investment is recorded at cost and subsequent to acquisition, the Investment and Investment Income account are adjusted periodically by recognizing the share of investee's earnings.
I have explained this in more detail by charting a T account of "Investment Account". ( Codification 325 formerly referred as APB 18) - This method is applicable when the investor is not able to exercise significant influence over the investee and generally is evidenced by lack of ability to take policy decisions, temporary investment, holds non-voting preferred stock or ownership in voting stock is less than 20%.
Upon acquisition, the investment is recorded at Cost.
Unlike Equity Method, the investment account under this method is not adjusted for investor's share of investee's income.
Dividend is recorded as income and an adjustment is made for liquidating dividends (i.e dividends distributed by the investee exceed the investor's share of earnings since acquisition are treated as return of capital and recorded as reduction of the investment account).