Journal entry for investment in shares of another company

Introduction

Sometimes, we may make the investment in shares of another company in order to earn extra revenues from the dividend or from the capital gain when the share price increases. In this case, we need to make the journal entry for investment in shares of another company by recognizing it as an asset on our balance sheet.

Additionally, when we receive the dividend from the investment that we have made by purchasing shares of another company, we also need to record it into our accounting record. Though, we may record the cash dividend received as the dividend revenue or as a reduction of our investment balance depending on the percentage of ownership we have in the investee company.

For example, we usually record the cash dividend received as the dividend revenue if we have less than 20% of shares of ownership in the investee company. On the other hand, we usually need to record the cash dividend received as the reduction of the balance of our stock investment if we have 20% or more shares of the ownership in the investee company.

Journal entry for investment in shares of another company

We can make the journal entry for investment in shares of another company by debiting the stock investment and crediting the cash account.

In this journal entry, the stock investment account is an asset account on the balance sheet, in which its normal balance is on the debit side. This stock investment can be a long-term asset or a short-term asset based on the purpose of the shares investment that we have made in another company.

Dividend received on the investment in shares of another company

As mentioned, we may receive the cash dividend from the investment in shares that we have made in another company. And such dividends may need to be recorded as the dividend revenue or as the reduction of the stock investment.

In this case, we can record the cash dividend received on the investment in shares that we have made in another company as in the journal entries below:

Less than 20% ownership of shares:

This journal entry will increase both total assets on the balance sheet and total revenues on the income statement as a result of the dividend received from the investment that we have in another company.

20% or more ownership of shares:

This journal entry will decrease the balance of the stock investment that we have on the balance sheet by the amount of the dividend received. This is due to the from 20% of shares of ownership or more, the investee company will either become our associate company (20%-50%) or become our subsidiary company (more than 50%).

Investment in shares of another company example

For example, on January 1, we have made a $200,000 investment in shares of another company with the name of ABC Corporation. This $200,000 investment in shares that we have bought represents 1% of shares of ownership in the ABC Corporation.

Later, on June 30, we have received a cash dividend of $5,000 from this investment that we have made in the shares of ABC Corporation.

In this case, we can make the journal entry for the $200,000 investment in shares of the ABC corporation by debiting this $200,000 to the stock investment account and crediting the same amount to the cash account.

January 1:

Later, on June 30, when we receive the $5,000 cash dividend from our investment, we can record this $5,000 cash dividend with the journal entry of debiting the cash account and crediting the dividend revenue account as below:

June 30: