Journal entry for investment in another company
Overview
In business, we may need to make the investment in another company for some reasons, such as to earn extra income, to gain some influence in the industry, or to have complete control over another company. In any case, we need to make the journal entry for investment in another company when we decide to invest in one.
Investment in another company usually comes in the form of debt investment or stock investment. For example, if we just need to earn extra income for the cash surplus we have on hand, we may decide to make an investment in another company in form of debt investment as it has a lower risk than the stock investment.
On the other hand, if we want to have influence in another business or have control in another company, we may need to make stock investments instead. This is due to buying common stock in another company is usually the only way we can gain control or have significant influence in another company.
Of course, we may also decide to buy stock in another company in order to receive the fixed dividend payment or to receive the dividend payment while waiting to sell it back when its value increases.
Journal entry for investment in another company
As mentioned, we may make investments in another company in form of debt investment or in form of stock investment. Likewise, the journal entry for investment in another company in form of debt investment will be different from those in form of stock investment.
Debt investment in another company
We can make the journal entry for debt investment in another company by debiting the debt investment account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Debt investments | ### | |
| Cash | ### |
Debt investments account is an asset on the balance sheet in which its normal balance is on the debit side of the trial balance. Likewise, in this journal entry, there is zero impact on total assets of the balance sheet as both debt investments and cash are assets, and while one increases, another decrease.
Stock investment in another company
On the other hand, if we make an investment in another company in form of stock investment, we can make the journal entry by debiting the stock investments account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Stock investments | ### | |
| Cash | ### |
In this journal entry, the stock investments account is also an asset on the balance sheet in which its normal balance is on the debit side. Likewise, the impact of this journal entry is the same as of the above journal entry as one asset increases and another decrease resulting in zero decreases or zero increases of total assets on the balance sheet.
However, the stock investment account here may represent further complicated works in accounting. For example, we may record the future dividend received from the stock investment in another company as dividend income or revenue if we have less than a 20% share of ownership.
On the other hand, if another company we invest in becomes our associate company, we need to record the dividend payment received as a deduction to our investment instead. And if we gain control over another company that we invest in, we may need to prepare full consolidated financial statements at the end of the accounting period in order to comply with the local law as well as accounting rules.
Investment in another company example
For example, on January 1, we make an investment in another company by buying a 6%, 5-year, $100,000 bond for $100,000 in cash, as it is not a discount nor a premium bond.
In this case, we can make the journal entry for the debt investment in another company on January 1 by debiting the $100,000 into the debt investments account and crediting the same amount into the cash account as below:
| Account | Debit | Credit |
|---|---|---|
| Debt investments | 100,000 | |
| Cash | 100,000 |
Example 2:
For another example, on January 1, we also purchase 100,000 shares of common stock of another company which represents 10% of ownership. We have to pay $5 per share in this transaction in which we make a total of $500,000 cash payment on January 1 for these 100,000 shares of common stock.
In this case, we can make the journal entry for the investment in another company in form of the 100,000 shares of common stock as below:
| Account | Debit | Credit |
|---|---|---|
| Stock investments | 500,000 | |
| Cash | 500,000 |