The Cost Method of Investment Accounting

The cost method of investment accounting is a method of calculating cost of investment made by an investor. There are two general rules of cost method of investment accounting one state that the investor has no influence over investee if the investor is investing 20 percent or less than that value in the company and the investment made by the investor has no easily determinable fair value or market value. According to the cost method of investment the account of investor is maintained at the historical cost that means that the cost at which the investor has purchased the investment from the investee. This historical cost appears as an asset for the balance sheet of the investor. Investor records the value of the investment in the beginning of the investment and it is not altered or changed until or unless there is specific evidence that the cost of the investment has been declined from the original cost or the fair cost of the investment in the market. If the fair price of the investment is declined the investor will rerecord the investment on the current fair price that is given in the market. However this cannot be done in reverse that means if the fair value of the investment increase it is not allowed according to the GAAP principles of recorded the investment on new and increased market price. Another rule associated with the cost method is that whenever investee pays dividend to the investor it is just consider as a dividend income and don’t have any impact on the original investment amount. The undistributed incomes of the investee will not be appear in the financial records of investors in any way.

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