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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Stock investment transactions

On January 23, 10,000 shares of Tolle Company are acquired at a price of $30 per share plus a $100 brokerage commission. On April 12, a $0.50-per-share dividend was received on the Tolle Company stock. On June 10, 4,000 shares of the Tolle Company stock were sold for $34 per share less a $100 brokerage commission. Prepare the journal entries for the original purchase, the dividend, and the sale under the cost method.

To determine

Journalize stock investment transactions under the cost method.

Explanation

Stock investments: Stock investments are equity securities which claim ownership in the investee company and pay dividend revenue to the investor company.

Cost method: Cost method is used to account for all the security transactions like purchase of stock, receiving dividends and selling of stock by the investor company, when the total equity investment amount to less than 20% of the outstanding stock of the investee company.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry for the purchase of 10,000 shares of Company T at $30 price per share and a brokerage of $100.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
January23Investments–Company T 300,100 
           Cash  300,100
  (To record purchase of shares of Company T for cash)   

Table (1)

  • Investments–Company T is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes: Compute amount of cash paid to purchase Company T’s stock.

  Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(10,000 shares ×$30)+$100= $300,100

Prepare journal entry for the dividend received from Company T for 10,000 shares.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
April12Cash 5,000 
           Dividend Revenue  5,000
  (To record receipt of dividend revenue)   

Table (2)

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes: Compute amount of dividend received on Company T’s stock.

Dividend received = {Number of shares × Dividend per share}= 10,000 shares ×$0

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