The cost method is a method of recording and recognizing the balance of an investment account. It is used when the investor has less than 20% of stock ownership and also does not exercise significant influence over the investee company. It is also referred to as the available for sale method and fair value method.
The cost method differs from the equity method that it records dividends from its investee as dividend income. However, the equity method considers dividends as a reduction of the investment in investee account.
Example:
Adequate Disclosure owns 5% of Inadequately Disclosed. Adequate Disclosure does not exercise any significant influence over Inadequately Disclosed’s business operations. On January 1st, 201X, Adequate Disclosure purchases 100,000 stocks worth $1. At the end of year 1, Inadequately Disclosed offers a $200,000 dividend. Record the following journal entry transactions.
