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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 9E
Textbook Problem
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Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year:

Chapter 15, Problem 9E, Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The

Journalize the entries for these transactions.

To determine

Journalize the stock investment transactions in the books of Industries S.

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 1,000 shares of Company T at $85 per share and a brokerage of $150.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
February24Investments–Company T Stock 85,150 
           Cash  85,150
  (To record purchase of shares for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
March16Investments–Company I Stock 90,100 
           Cash  90,100
  (To record purchase of shares for cash)   

Table (2)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
July14Cash 39,925 
       Gain on Sale of Investments  5,865
       Investments–Company T Stock  34,060
  (To record sale of shares)   

Table (3)

  • 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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Chapter 15 Solutions

Financial Accounting
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