A company invests in shares of another company for $200,000, which allows it to exert significant influence (20% ownership). Explain how the investment should be accounted for and prepare the journal.

The investment in shares of another company where significant influence is exerted should be accounted for using the equity method of accounting. Under the equity method, the initial investment is recorded at cost and subsequently adjusted for the company's share of the investee's net income or loss, dividends received, and any other changes in the investee's equity.

To account for the investment in this scenario, the following journal entry should be made:

Investment in Company XYZ (Asset) $200,000
Cash (Asset) $200,000

This entry records the initial investment in Company XYZ at cost.

Subsequently, as the investee company reports its net income, the investing company will record its share of the net income as follows:

Investment in Company XYZ (Asset) $X
Equity in Earnings of Company XYZ (Revenue) $X

The amount recorded as equity in earnings will be based on the investing company's ownership percentage (20% in this case) of the investee's net income.

Similarly, any dividends received from the investee company will be recorded as follows:

Cash (Asset) $X
Investment in Company XYZ (Asset) $X

Any changes in the investee's equity that are not related to net income or dividends will also be accounted for in the investing company's financial statements.

Overall, the equity method of accounting allows the investing company to reflect its ownership interest in the investee company and its share of the investee's financial performance in its own financial statements.

Accounting for Equity Investment (Significant Influence)

Under the equity method, the investment is initially recorded at cost ($200,000). As the company exerts significant influence over the investee, it has the ability to influence the financial and operating decisions of the investee. Therefore, the investment is accounted for using the equity method.

Equity Method Journal Entry:

Initial Investment:

```
Debit: Investment in Investee $200,000
Credit: Cash $200,000
```

Subsequent Adjustments:

Each year, the investor's share of the investee's net income (or loss) is recognized as income (or loss) by the investor. Additionally, the investor's share of the investee's dividends is recorded as a reduction to the investment account.

Example:

- Assume the investee earns net income of $50,000 for the year. The investor's 20% share of this income is $10,000.

```
Debit: Investment in Investee $10,000
Credit: Income from Investments $10,000
```

- Assume the investee pays a dividend of $15,000. The investor's 20% share of this dividend is $3,000.

```
Debit: Investment in Investee $3,000
Credit: Dividends Receivable $3,000
```

Note:

- The investment account balance will fluctuate over time based on the equity method adjustments and any changes in the fair value of the investment.
- The investor may also need to record impairment losses if the fair value of the investment falls below its carrying amount.