What Is the Cost Approach?

Cost method: refers to the method of valuing long-term equity investment at the actual cost of the investment. This method requires that the book value of long-term equity investment is increased only when the company increases its long-term foreign investment. ^[1]

Cost method

Accounting method of cost method:

(1) When an investment company purchases shares, debit

(1) The long-term equity investment is valued at the initial investment cost, and the cost of the long-term equity investment is not adjusted unless there is additional or recovered investment. (2) The cash dividends or profits declared by the investee shall be regarded as investment income for the current period. However, it should be noted that the profits or cash dividends should only be accumulated when the dividends distributed by the invested unit belong to the nature of the investment.

The accounting method of the cost method is relatively simple, but the investment company cannot reflect its share in the equity of the invested company's shareholders on the books, so the cost method is only applicable to the investment company's share in the equity of the invested company Imposition of investment company operating decisions, accounting decisions, etc.

Accounting treatment of cost-to-equity companies:

The long-term equity investment of an enterprise shall be calculated using the cost method and the equity method according to the investment proportion or degree of influence on the invested unit. When the financial staff performs additional accounting, the accounting method is changed from the cost method to the equity method. It is often easy to confuse the three-level detailed accounts under the equity method. It cannot provide accurate accounting information and will affect the accuracy of business results. Sex. This article uses a typical example to explain how to deal with accounting and several issues that should be paid attention to in this case.

Company M purchased the shares of company N for 8 million yuan on March 1, 2004, which accounted for 10% of the actual number of shares outstanding of company N. Company M adopted the cost method. On May 1, 2004, Company M received a cash dividend of 300,000 yuan from Company N. On March 1, 2004, the total equity of company N was RMB 62 million. In 2004, N company realized a net profit of 6 million yuan, of which 5 million yuan was achieved in March to December. On April 1, 2005, Company M purchased 15% of the number of shares issued by Company N for 14.255 million yuan. On May 1, 2005, company M received a cash dividend of 1.02 million yuan from company N. In 2005, N Company realized a net profit of 8.7 million yuan, of which 1.7 million yuan was achieved from January to March, and 7 million yuan was achieved from April to December. The equity investment difference is amortized over 10 years.

When investing on March 1, 2004, Company M's accounting treatment:

Borrow: Long-term equity investment-N company 8 000 000

Loan: bank deposit 8 000 000.

When Company M received the cash dividend on May 1, 2004, the investment cost should be offset.

Borrow: bank deposit 300000

Loan: Investment income of 300,000.

After the additional investment of Company M on April 1, 2005, it accounted for 25% of the actual number of shares issued by Company N. If it exercises joint control or has a significant impact on Company N, it should be accounted for using the equity method, and the original cost method should be used for comparison. Company N's investment is retrospectively adjusted to correctly calculate the amount of each three-level account under the equity method, which is the key link of the cost method to equity method.

Investment cost under long-term equity investment cost method before additional investment = 8000000-300000 = 7700000 (yuan);

Equity investment balance formed in 2004 investment = 8000000-62000000 × 10% = 1800000 (yuan);

As of April 1, 2005, the difference between the amortized equity investment = 1800000 ÷ 10 × 13 ÷ 12 = 195000 (yuan); the amortization time limit is 10 years, at which time the 13-month difference should be amortized, so divide by 10 years and then Divided by 12 months multiplied by 13 months, this node is the amortized investment difference.

As of April 1, 2005, the share of the net profit and loss of company N should be confirmed = (5000000 + 1700000) × 10%-195000 = 475000 (yuan);

The cumulative impact of the conversion from the cost method to the equity method = (5000000 + 1700000) × 10% = 670000 (yuan). Since the previous year's profit and loss account has been closed, the "profit distribution-undistributed profits" account should be adjusted.

The investment cost under the long-term equity investment equity method on April 1, 2005 = 8000000-300000-1800000 = 5900000 (yuan).

Borrow: Long-term equity investment-Company N (investment cost) 5900000

Company N (profit and loss adjustment) 670000

Company N (equity investment difference) 1605000 (1800000-195000, remaining unamortized equity investment difference)

Loan: Long-term equity investment-N company 7700000

Profit distribution-undistributed profit 475,000.

Additional investment on April 1, 2005:

Borrow: Long-term equity investment-Company N (investment cost) 14255000

Loan: bank deposit 14255000

Borrow: Long-term equity investment-Company N (investment cost) 670000

Loan: Long-term equity investment-Company N (profit and loss adjustment) 670,000.

Calculate the equity investment difference for reinvestment, that is, the difference between the new investment cost and the share of owner's equity that should be enjoyed by N company = 14255000 (62000000-300000 ÷ 10% + 5000000 + 1700000) × 15% = 4400000 (yuan)

Borrow: Long-term equity investment-Company N (equity investment difference) 4,400,000

Loan: Long-term equity investment-Company N (investment cost) 4,400,000.

Generally speaking, the cash dividends that the investing enterprise should calculate based on the shareholding ratio and belong to the invested unit's net profit should be deducted from the long-term equity investment "profit and loss adjustment" line item, but in this case, the The profit and loss adjustment amount has been transferred to the "investment cost" detail account. Therefore, all cash dividends received by Company M on May 1, 2005 will be offset by the "investment cost" detail account.

Borrow: bank deposit 1020000

Loan: Long-term equity investment-Company N (investment cost) 1020000.

On December 31, 2005, the investment income that Company M should enjoy = 7000000 × 25% = 1750000 (yuan).

Borrow: Long-term equity investment-Company N (profit and loss adjustment) 1750000

Loan: Investment income-equity investment income of 1.75 million.

The difference between the equity investment resulting from the retrospective adjustment of the long-term equity investment and the equity investment newly generated from the additional investment shall be calculated separately and amortized separately. However, if the amount of the new equity investment difference is not large, it may be merged into the original equity investment difference and amortized together. On December 31, 2005, the balance of the amortized equity investment of Company M = 1800000 ÷ 10 × 9 ÷ 12 + 4400000 ÷ 10 × 9 ÷ 12 = 465000 (yuan).

Borrow: Investment income-amortization of equity investment difference 465000

Loan: Long-term equity investment-Company N (profit and loss adjustment) 465000.