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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 stock investments, dividends, and sale of stock

Yerbury Corp. manufactures construction equipment. Journalize the entries to record the following selected equity investment transactions completed by Yerbury during a recent year:

Feb. 2. Purchased for cash 5,300 shares of Wong Inc. stock for $20 per share plus a $110 brokerage commission.

Mar. 6. Received dividends of $0.30 per share on Wong Inc. stock.

June 7. Purchased 2.000 shares of Wong Inc. stock for $26 per share plus a $120 brokerage commission.

July 26. Sold 6,000 shares of Wong Inc. stock for $35 per share less a $100 brokerage commission. Yerbury assumes that the first investments purchased are the first investments sold.

Sept. 25- Received dividends of $0.40 per share on Wong Inc. stock.

To determine

Equity investments: Equity investments are stock instruments 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 Corporation Y

Explanation

Prepare journal entry for the purchase of 5,300 shares of Incorporation W at $20 per share and a brokerage of $110.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 2 Investments–Incorporation W Stock   106,110  
             Cash     106,110
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Incorporation W 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 Incorporation W’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(5,300 shares ×$20)+$110= $106,110                      (1)

Prepare journal entry for the dividend received from Incorporation W for 5,300 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
March 6 Cash   1,590  
             Dividend Revenue     1,590
    (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 Incorporation W’s stock.

Dividend received = {Number of shares × Dividend per share}= 5,300 shares ×$0.30= $1,590

Prepare journal entry for the purchase of 2,000 shares of Incorporation W at $26 per share and a brokerage of $120.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
June 7 Investments–Incorporation W Stock   52,120  
             Cash     52,120
    (To record purchase of shares for cash)      

Table (3)

Explanation:

  • Investments–Incorporation W 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 Incorporation W’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(2,000 shares ×$26)+$120= $52,120                   (2)

Prepare journal entry for sale of 6,000 shares of Incorporation W at $35, with a brokerage of $100.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
July 26 Cash   209,900  
         Gain on Sale of Investments     85,548
         Investments–Incorporation W Stock     124,352
    (To record sale of shares)      

Table (4)

Explanation:

  • Cash is an asset account

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