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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

Entries for investment in stock, receipt of dividends, and sale of shares

The following equity investment transactions were completed by Romero Company during a recent year:

Apr. 10. Purchased 5,000 shares of Dixon Company for a price of $25 per share plus a brokerage commission of $75.

July 8. Received a quarterly dividend of $0.60 per share on the Dixon Company investment.

Sept 10. Sold 2,000 shares for a price of $22 per share less a brokerage commission of $120. Journalize the entries for these transactions.

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.

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 in the books of Company R

Explanation

Prepare journal entry for the purchase of 5,000 shares of Company D at $25 per share and a brokerage of $75.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
April 10 Investments–Company D Stock   125,075  
             Cash     125,075
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Company D Stock 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 D’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(5,000 shares ×$25)+$75= $125,075

Prepare journal entry for the dividend received from Company D for 5,000 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
July 8 Cash   3,000  
             Dividend Revenue     3,000
    (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 D’s stock.

Dividend received = {Number of shares × Dividend per share}= 5,000 shares ×$0.60= $3,000

Prepare journal entry for sale of 2,000 shares at $22, with a brokerage of $120.

Date Account Titles and Explanations Post

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