Concept explainers
(a)
Cost method: It refers to an accounting technique used by an investor to determine the income earned on investments made in short-term equity securities of a company. Thus, the investor who own a non-significant interest by having less than 20% of ownership, accounts for investments in short-term equity securities under this method.
Equity method: It refers to an accounting technique used by an investor to determine the income earned on investments made in long-term equity securities of a company. Thus, the investor who owns a significant interest by having more than 20%, but less than 50% of ownership, accounts for investments in long-term equity securities under this method.
To Record: The stock transactions in the books of S Cosmetics.
(a)
Explanation of Solution
Available-for-sale securities: Available-for-sale are short-term or long-term debt equity securities that are not classified as trading or held to maturity securities. These securities are readily sold in the short-term to receive return on investment.
Record the purchase entry of stock.
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
March 18, 2017 | Stock Investments | 504,000 (1) | ||
Cash | 504,000 | |||
(To record the purchase of stock investments.) |
Table (1)
Working Note:
Compute cost of stock investment.
Description:
- Stock Investments is an asset account. The amount has increased due to purchase of stock investment. Therefore, debit Stock Investments account with $504,000.
- Cash is an asset account. The amount has decreased because the stock investment is purchased for cash. Therefore, credit Cash account with $504,000.
Record the
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
June 30, 2017 | Cash | 9,000 | ||
Dividend Revenue | 9,000 (2) | |||
(To record the receipt of dividend revenue.) |
Table (2)
Working Note:
Compute the amount of dividend received.
Description:
- Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $9,000.
- Dividend Revenue is a revenue account. Revenue increases
stockholders’ equity account. Therefore, credit Dividend Revenue account with $9,000.
Record the
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) |
December 31, 2017 | Fair Value Adjustment-Available-for-sale | 72,000 | ||
Unrealized Gain or Loss-Equity | 72,000 (3) | |||
(To record the unrealized gain on available-for-sale securities) |
Table (3)
Description:
- Fair Value Adjustment–Available-for-Sale is a contra-asset account. The account shows a debit balance since the market price has increased (gain); therefore, debit Fair Value Adjustment–Available-for-Sale with $72,000.
- Unrealized Gain or Loss–Equity is an adjustment account to report the investment at fair market value. Since gain has occurred while adjusting; therefore, credit Unrealized Gain or Loss–Equity account with $72,000.
Working Notes:
Calculate the unrealized gain (loss) as on December 31.
Fair value = $576,000 (4)
Cost = $504,000 (1)
Compute fair market value of 36,000 shares.
(b)
To Record: The stock transactions in the books of W Incorporation.
(b)
Explanation of Solution
Record the purchase entry of stock.
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
January 1, 2017 | Stock Investments | 82,500 (5) | ||
Cash | 82,500 | |||
(To record the purchase of stock investments.) |
Table (4)
Working Note:
Compute cost of stock investment.
Description:
- Stock Investments is an asset account. The amount has increased due to purchase of stock investment. Therefore, debit Stock Investments account with $82,500.
- Cash is an asset account. The amount has decreased because the stock investment is purchased for cash. Therefore, credit Cash account with $82,500.
Record the journal entry for the dividends recognized by investor.
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
June 15, 2017 | Cash | 8,750 | ||
Stock Investments | 8,750 (6) | |||
(To record the dividends received from the investee company.) |
Table (5)
Working Note:
Compute amount of dividends received from investee.
Description:
- Cash is an asset account. Since cash is received as dividends, cash amount has been increased. Therefore, debit Cash account with $8,750.
- Stock Investments is an asset account. Since Stock investment account is reduced, credit Stock Investments account with $8,750.
Record the journal entry for the equity on net income.
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2017 | Stock Investments | 30,000 | ||
Revenue from Stock Investments | 30,000 (7) | |||
(To record the equity on the net income of the investee company.) |
Table (6)
Working Note:
Compute amount of income received from investee.
Description:
- Stock Investments is an asset account. The asset is increased as the stock investment is increased. Therefore, debit Stock Investments account with $30,000.
- Revenue from Stock Investments is a revenue account. Revenue increases the value of stockholders’ equity account. Therefore, credit Revenue from Stock Investments account with $30,000.
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