[aliciarenee80]

This question asks me to prepare the necessary journal entries for common stock under...

The cost method classified as available-for-sale securities

As well as it asks me to do the same thing for the equity method which I understand, but when it comes to the cost method I'm confused.

Can anyone point me in the right direction here based on this or should I post the actual problem?

[morgaine300]

Let me give you some info first and then if you want to post a specific problem with your answers, you can do that too.

The cost method is the one being used when they buy less than 20% of the company's outstanding stock. I just consider it the "normal" method. The main difference is in how you treat the company's net income and dividends.

In the equity method you are actually taking a share of the other company's net income onto your books. You don't do that with cost method, so there simply is no entry for that.

When dividends are paid, for the equity method, it's treated kind of like a drawing rather than a dividend. It's put against the net income you recorded earlier as having been received. For the cost method, it's dividend revenue. There's two ways to do that. One is to put it in as a Dividend Receivable and record the Dividend Revenue at the time it is declared. The other method is to record it when it is received, meaning you got Cash, and you still record the Dividend Revenue. Your book may have a preference on this.

Also, for available-for-sale you may be dealing with adjusting to market at year-end. I don't know if they're throwing that part at you or not. And honestly, I don't remember that part particularly well as it's a more intermediate subject (which I don't teach) and not one I've ever had to use in real life work. (Don't use it, you lose it. :-)) What I do know is that you do not recognize an unrealized gain or loss on the income statement. It's adjusted through equity somewhere and that's what I really don't remember. (I could look this up if you need to know that part and someone else doesn't get to it.)

But see if the stuff about the dividends helps get you through that part. I don't even know what specific entries they're wanting you to do.