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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

Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year:

Feb. 24. Acquired 1,000 shares of Tett Co. stock for $85 per share plus a $150 brokerage commission.

May 16. Acquired 2,500 shares of Issacson Co. stock for $36 per share plus a $100 commission.

July 14. Sold 400 shares of Tett Co. stock for $100 per share less a $75 brokerage commission.

Aug. 12. Sold 750 shares of Issacson Co. stock for $32.50 per share less an $80 brokerage commission.

Oct. 31. Received dividends of $0.40 per share on Tett Co. stock.

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 Industries S

Explanation

Prepare journal entry for the purchase of 1,000 shares of Company T at $85 per share and a brokerage of $150.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 24 Investments–Company T Stock   85,150  
             Cash     85,150
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Company T 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 T’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(1,000 shares ×$85)+$150= $85,150

Prepare journal entry for the purchase of 2,500 shares of Company I at $36 per share and a brokerage of $100.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
March 16 Investments–Company I Stock   90,100  
             Cash     90,100
    (To record purchase of shares for cash)      

Table (2)

Explanation:

  • Investments–Company I 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 I’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(2,500 shares ×$36)+$100= $90,100

Prepare journal entry for sale of 400 shares of Company T at $100, with a brokerage of $75.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
July 14 Cash   39,925  
         Gain on Sale of Investments     5,865
         Investments–Company T Stock     34,060
    (To record sale of shares)      

Table (3)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Gain on Sale of Investments is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
  • Investments–Company T Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Working Notes:

Calculate the realized gain (loss) on sale of stock.

Step 1: Compute cash received from sale proceeds.

Cash received = {(Number of shares sold× Sale price per share)Brokerage commission}(400 shares ×$100)$75= $39,925

Step 2: Compute cost of stock investment sold.

Cost of stock investment sold} = Number of shares sold × Price per share= Number of shares sold ×Cost of 1,000 sharesNumber of shares= 400 shares ×$85,1501,000 shares= $34,060

Step 3: Compute realized gain (loss) on sale of stock

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