Cost Method (Journal Entries) - YouTube

so let's look over the cost method from chapter  16 so when you're dealing with stock investments  

you're gonna have to make the decision are you  working under the cost method or the equity method  

and the way that we figure that out is based off  of the ownership that you have in another company  

so if you have between 0 and 20 percent then  we use the cost method if you have between 20  

and 50 percent then we use the equity method so  let's take a look at this example here no skirt  

Inc had the following transactions pertaining  to investments in common stock so on January  

1st they purchased twenty five hundred shares  of Escalante corporation common stock just five  

percent of that business for a hundred and fifty  two thousand dollars in cash then on December  

1st they sold five hundred of those shares for  thirty two thousand dollars so the reason that  

we know it's the cost method is because of that  five percent we own five percent of Escalante  

corporation well if we take a look back at this  chart five percent falls between zero and twenty  

and that's how we know to use the cost method  so now let's work on these journal entries so  

first the purchase of stock so we know we're  working with the cost method and on January  

first when you purchase stock in another company  we call that stock investments because you are  

investing in another company's stock and we're  gonna use cash to pay for all of this stock so  

now we need to think about what numbers we want  to use in this entry well we have a number of  

shares we have an ownership percentage and  then we have the amount of cash that we paid  

out well we definitely want to show that our cash  decreased by a hundred and fifty two thousand we  

also want to show that our stock investments  we now have more stock investments and so we  

need to increase that account as well by 152,000  so now on December 1st on December 1st you sold  

500 shares for $32,000 cash so we know our cash  is going up we're getting money here and we know  

that our stock investments have to decrease so we  want to credit our stock investments you'll notice  

I left a gap in between those two that's gonna  come into play down the road here so how much  

cash did you get well you got $32,000 because we  sold these shares for $32,000 cash for the stock  

investments we're going to need to do a little  bit of math here so we initially purchased 2500  

shares for 152 dollars we need to figure out the  per share amount so we take that 152,000 divided  

by the 2,500 shares that we bought and we'll see  that we spent 60 dollars and 80 cents per share  

so in this transaction we sold 500 shares so if we  do 500 times the original cost of those shares the  

60 dollars and 80 cents we get 30,000 400 so our  stock investments are decreasing by 30,000 400 so  

you'll notice now your debits and credits don't  equal so we need to have another account here  

to make it equal so we sold stock investments on  our books that were worth 30,000 400 and we got  

people to pay us $32,000 for it so that's gonna  be a gain so a gain on the sale of the stock for  

the difference between the amount of cash that  we got and the value of our stock investments