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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 September 12, 2,000 .shares of Aspen Company are acquired at a price of $50 per share plus a $200 brokerage commission. On October 15, a $0.50-per-share dividend was received on the Aspen Company stock. On November 10, 1,200 shares of the Aspen Company stock were sold for $42 per share less a $150 brokerage commission. Prepare the journal entries for the original purchase, the dividend, and the sale under the cost method.

To determine

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

Cost method: Cost method is the accounting method used for accounting stock or equity investments which claim 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.

To journalize: The stock investment transactions under the cost method

Explanation

Prepare journal entry for the purchase of 2,000 shares of Company A at $50 price per share and a brokerage of $200.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
September 12 Investments–Company A   300,100  
             Cash     300,100
    (To record purchase of shares of Company A for cash)      

Table (1)

Explanation:

  • Investments–Company A 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 A’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(2,000 shares ×$50)+$200= $100,200

Prepare journal entry for the dividend received from Company A for 2,000 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
October 15 Cash   1,000  
             Dividend Revenue     1,000
    (To record receipt of dividend revenue)      

Table (2)

Explanation:

  • 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 A’s stock.

Dividend received = {Number of shares × Dividend per share}= 2,000 shares ×$0.50= $1,000

Prepare journal entry for sale of 1,200 shares of Company A at $42 per share, and a brokerage of $150.

Date Account Titles and Explanations Post

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