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Accounting For Investment Example
Accounting For Investment Example
Accounting For Investment Example
JKL Company and PQR Company each own 100 shares of XYZ Company common stock. JKL and
PQR purchased their holdings in XYZ at different times and at different prices. JKL Company’s cost for its
100 shares of the stock was $500, and PQR Company’s cost for its 100 shares of the stock was $1,100.
JKL and PQR each receive a $10 per share dividend from XYZ Company, for a total of $1,000. XYZ provides
information to shareholders that $3 per share of the dividend is being paid from earnings and $7 per share
of the dividend is a partially liquidating dividend. For each shareholder, $300 is a dividend received from
earnings and $700 is a partially liquidating dividend.
Answer:
JKL Company:
Since JKL cannot reduce the carrying value of its investment in XYZ Company below its $500 cost for the
stock, JKL records a credit to its investment in XYZ in the amount of $500 and records the amount of the
partially liquidating dividend received in excess of its cost for the stock as a realized gain, as follows. (The
journal entry is shown on the cash basis for simplicity, but a dividend receivable would be recorded on
the date of record and cash would be debited and the receivable credited when the dividend was actually
received.)
Accounts Debit Credit
Cash ( $10 x 100 sh.) $ 1,000
Dividend revenue ($3×100 sh.) $ 300
Investment – XYZ Company common stock ($5×100 sh.) $ 500
Realized gain on XYZ Company common stock ($2×100 sh.) $ 200
After recording the partially liquidating dividend, JKL’s carrying value for the XYZ common stock is zero.
If JKL receives another liquidating dividend from XYZ in the future, JKL will record all of it as a realized gain.
PQR Company:
Since PQR Company’s carrying value for the XYZ common stock was $1,100 before receipt of the partially
liquidating dividend, PQR Company credits the full $7 per share of the partially liquidating dividend to its
investment in XYZ, reducing its carrying value for the stock to $400 ($1,100 − $700). PQR Company records
the $1,000 it receives as follows:
Accounts Debit Credit
Cash ($10×100 sh.) $ 1,000
Dividend revenue ($3×100 sh.) $ 300
Investment – XYZ Company common stock ($7×100 sh.) $ 700
If PQR receives another liquidating dividend from XYZ Company in the future, PQR will record up to its
$400 carrying value for the XYZ stock as a reduction to its carrying value and will record as a realized gain
any amount of the liquidating dividend received in excess of its carrying value.