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Equity Method (Journal Entries) - YouTube
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let's take a look at the equity method
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from chapter 16 so when you're dealing
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with stock investments you have to make
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the decision as to whether you're
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working under the cost method or the
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equity method and the way that we decide
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that is based off of how much ownership
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in stock you have so if you have between
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0 and 20 percent that's the cost method
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and if you have between 20 and 50
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percent because you have that
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significant influence you change up how
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you value these investments and we use
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what's called the equity method so we
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need to prepare the journal entries from
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for Knoller company for the following
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transactions so the first one Knoller
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company acquires 25 percent of the
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common stock of Laur company for a
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hundred and fifty thousand dollars on
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January 1st 2019 and then at the end of
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2019 our company reports a net income of
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$180,000 and declares and pays a $50,000
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cash dividend so we have 25 percent
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ownership of Laur company that puts us
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between 20 and 50 which tells us we now
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have to use the equity method so we have
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a few different journal entries for
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these transactions the first one on
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January 1st Knoller company acquires
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$25,000 of the common stock of our
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company for a hundred and fifty thousand
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dollars well your stock investments are
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going to go up so we need to debit our
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stock investments and we're using cash
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to buy the stock
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so we credit our cash to show that our
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cash is decreasing
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now how much well you acquired all of
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that stock for a hundred and fifty
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thousand dollars so we need to debit
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stock investments and credit cash
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for 150,000 dollars now at the end of
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2019 so there's two separate pieces that
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this problem tells you about the end of
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2019
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first there's the net income of a
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hundred and eighty thousand dollars well
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under the equity method you get a piece
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of that net income so the way that we
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record that is a debit to stock
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investments and a credit to revenue from
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stock investments now do you get all
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180,000 no right you only own 25 percent
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of this company so you get 25 percent of
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their net income so if we take a hundred
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and eighty thousand dollars and multiply
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it by 0.25 you'll end up with forty five
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thousand dollars so we debit our stock
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investments forty-five thousand and we
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credit our revenues from stock
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investments for forty five thousand now
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we have one last piece here
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Laur company also declared and paid a
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fifty thousand dollar cash dividend so
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our accounts here you'll see cash as the
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debit because we are going to be
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receiving a cash dividend and we credit
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our stock investments now once again do
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you get all fifty thousand dollars of
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this cash dividend no right that's
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$50,000 to all of their shareholders you
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own 25 percent of the company so you get
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25 percent of this cash dividend so if
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we take 50 thousand times 0.25 we'll end
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up with 12,500
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