Journal Entry for Purchase of Stock Investment
Overview
The company may sometimes make an equity investment in the stock market in order to earn extra revenue to support the business operation. And one common equity investment is purchasing the stock in the capital market. Likewise, the company needs to make the journal entry for the purchase of stock investment when it decides to purchase it as an investment asset.
Purchase of stock investment provides two main benefits to the company, in which the first one is that it can earn the dividend revenue from the investment. And another one is that it can enjoy the benefits from the value gain when the investee company performs well in the market.
Journal entry for purchase of stock investment
The company can make the journal entry for purchase of stock investment by debiting the stock investments account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Stock investments | 000 | |
| Cash | 000 |
Stock investments account is an asset account on the balance sheet, in which its normal balance is on the debit side. Likewise, in this journal entry, there is no impact on the total assets of the balance sheet as it results in the increase of one asset (stock investment) and the decrease of another asset (cash).
It is important to note that the purchase of stock investment is recorded at cost, which includes all expenses necessary to acquire the stock investment, such as price paid and brokerage fee, etc.
Purchase of stock investment example
For example, on June 9, the company ABC purchases 10,000 shares of common stock of the company XYZ. The company ABC pays $10 per share and the 10,000 shares that it owns represent 10% of the ownership in XYZ.
In this case, the company ABC can make the journal entry for the purchase of stock investment of $100,000 (10,000 shares x $10) as below:
| Account | Debit | Credit |
|---|---|---|
| Stock investments | 100,000 | |
| Cash | 100,000 |
In this journal entry, while the stock investments account increases by $100,000, the cash account decreases by the same amount. So, there is no impact on the total assets on the balance sheet of the company ABC.
It is useful to note that even though the journal entry for the purchase of stock investment is similar to the purchase of debt investments, it may be different from one investment to another when it comes to the recognition of revenue and dividend from the stock investments. This will depend on how much ownership the company has in other companies.
For example, the company can use the cost method of accounting for the ownership less than 20%, however when it has ownership from 20% to 50% it needs to use the equity method to record the revenue and dividend it earns from the investee company. On the other hand, if the company holds more than 50% ownership, it will become the parent company and the investee company will become its subsidiary company.