Module 7:
Intercorporate Investments
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Investment in Marketable Equity
Securities - Overview

Equity investments represent ownership of
another company’s outstanding common stock.
 Marketable equity investments are actively traded
on a public stock exchange.
 By owning shares of common stock, the investor
“owns” a part of the company, represented by the
percentage ownership.
 There are different accounting rules for:
(1) less than 20 percent ownership (passive).
(2) between 20 and 50 percent ownership
(significant influence).
(3) greater than 50 percent ownership (control).
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(1) Less than 20 % ownership.
If marketable securities, use the mark-to
market method.
 Carries securities on balance sheet at
market value.
 Revaluation at the end of each period
based on new market price
 Unrealized gains (or losses) are recognized
as the investment is valued up (or down).
 Treatment of the Unrealized G/L depends
on classification of security:
– (a) Trading securities.
– (b) Available-for-sale securities.

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(a) Trading Securities
Trading securities held for the short term,
with purpose of selling securities for profit.
 At purchase - record at cost to acquire.
 Activity during the year - record
declaration/receipt of cash dividends, and
recognize “Dividend Income” on the
Income Statement.

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(a) Trading Securities
For securities on hand at the end of the
accounting period - revalue to market value
and record “Unrealized Gain/Loss” on
Income Statement.
 When sold - recognize “Gain/Loss on
Sale” on Income Statement for any
balance since the last revaluation.

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(b) Available-for-sale Securities
Available-for-sale (AFS) securities may be
held for the short term or for long term,
depending on management’s intentions.
 At purchase - record at cost to acquire.
 Activity during the year - record
declaration/recept of cash dividends, and
recognize “Dividend Income” on the
Income Statement.

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(b) Available-for-sale Securities
For securities on hand at the end of the
accounting period - revalue to market value
and record “Unrealized Gain/Loss” on
Balance Sheet, as part of Other
Comprehensive Income in Stockholders’
Equity (more on OCI in Module 9).
 When sold - recognize “Gain/Loss on
Sale” on Income Statement for total
difference between original cost and selling
price.

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(2) From 20% to 50% Investment
Because investment represents significant
influence of investor, we cannot account
for investments the same way as Trading
or AFS.
 Specifically, we cannot recognize
“Dividend Income” as dividends are
declared, because the investor can control
dividend payout, and therefore control the
creation of income.

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(2) From 20% to 50% Investment
The equity method increases the
investment account and recognizes
investor’s portion of income as investee
earns it (as investee reports income to
investor).
 The equity method decreases the
investment account as investee declares
dividends to the investor.
 Note: additional complications from equity
method from cost exceeding fair value of
investment (e.g., goodwill) are not
addressed here for unconsolidated
investments.

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Cautions Regarding Equity Method

The equity ignores market value for the investment
account. Instead the investment account
fluctuates as the investee’s equity fluctuates
(income in excess of dividends).
 20-50 percent is not always a valid indication of
significant influence.
 It generates off-balance sheet financing - one line
on the balance sheet may actually represent a
percentage ownership in a number of assets and
liabilities. (Consolidated investments show all the
detail of assets and liabilities, where
unconsolidated investments show only a net asset
amount).
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(3)Greater than 50% Investment
If an investor has majority control, the
investment is recorded using the equity
method, and a parent/subsidiary
relationship is established.
 At the end of the period, the financials of
the parent and subsidiary must be
combined, or consolidated, for external
financial reporting.
 Goodwill is recognized as a separate
asset in the consolidation.

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