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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 8E
Textbook Problem
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Yerbury Corp. manufactures construction equipment. Journalize the entries to record the following selected equity investment transactions completed by Yerbury during a recent year:

Chapter 15, Problem 8E, Yerbury Corp. manufactures construction equipment. Journalize the entries to record the following

To determine

Journalize the stock investment transactions in the books of Corporation Y.

Explanation of Solution

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.

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
February2Investments–Incorporation W Stock 106,110 
           Cash  106,110
  (To record purchase of shares for cash)   

Table (1)

  • 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

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
March6Cash 1,590 
           Dividend Revenue  1,590
  (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 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
June7Investments–Incorporation W Stock 52,120 
           Cash  52,120
  (To record purchase of shares for cash)   

Table (3)

  • 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

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
July26Cash 209,900 
       Gain on Sale of Investments  85,548
       Investments–Incorporation W Stock  124,352
  (To record sale of shares)   

Table (4)

  • Cash is an asset account

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Chapter 15 Solutions

Financial Accounting
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