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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 7E
Textbook Problem
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The following equity investment transactions were completed by Romero Company during a recent year:

Chapter 15, Problem 7E, The following equity investment transactions were completed by Romero Company during a recent year:

Journalize the entries for these transactions.

To determine

Journalize the stock investment transactions in the books of Company R.

Explanation of Solution

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.

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
April10Investments–Company D Stock 125,075 
           Cash  125,075
  (To record purchase of shares for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
July8Cash 3,000 
           Dividend Revenue  3,000
  (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 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

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Chapter 15 Solutions

Financial Accounting
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