Investment:
It is a financial term which refers to spend or deposit money to get the financial benefits.
The different ways in which a firm can invest are mentioned below:
- Long-term investments
- Short-term investments
Short-term investments:
It includes such investments which are highly liquid in nature as these can be convert in form of cash easily during the period of 1 year.
Long-term investments:
It includes such investments which are not highly liquid in nature and mature after completion of period of minimum one year.
It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.
Rules of Journal Entry:
The rules for journal entry are defined by 5 accounting components,
- Assets: Increase in asset should be debit and decrease should be credit.
- Liabilities: Increase in liabilities should be credit and decrease should be debit.
- Equity: Increase in Equity should be credit and decrease should be debit.
- Expense: Increase in expense should be debit and decrease should be credit.
- Revenue: Increase in revenue should be credit and decrease should be debit.
To prepare: Journal entry for given transactions.
Explanation of Solution
2017
On January 2, 30,000 shares are purchased from G Company for $408,000 with $3,000 brokerage fee.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 2, 2017 | Long-Term Investments | 411,000 | ||
Cash | 411,000 | |||
(To record short-term investment with brokerage) |
Table 1 Long-Term Investments is an asset account. Since, shares are purchased under category of trading securities, balance of assets has increased. So, debit Short-Term Investments account
- Cash is also an asset account. Since, cash is paid, balance of assets has decreased. Hence, Cash account is credited.
On September 1, received dividend from G Company of $1.50 per share (shares purchased above).
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
September 1 | Cash | 45,000 | ||
Long-Term Investments | 45,000 | |||
(To record dividend on investment) |
Table 2
- Cash is also an asset account. Since, cash is received, balance of assets has increased. Hence, Cash account is debited.
- Long-Term Investments is an asset account. Since earnings are already recorded on long-term investments, balance debited to long-term investment as earnings should be transferred to cash. So, credit Long-Term Investments account.
Working note
Computation of dividend:
On December 31, record earnings from investment on basis of net income of the company.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
December 31 | Long-Term Investments | 162,000 | ||
Earnings from Investments | 162,000 | |||
(To record dividend on investment) |
Table 3
- Long-Term Investments is an asset account. Since earnings are earned on long-term investments, balance of assets has increased. So, debit Long-Term Investments account.
- Earnings from Investment is a revenue account. The portion of net income related to equity will be treated as earnings, balance of revenue has increased. So, credit the Earnings from Investments account.
Working note
Computation of equity earnings:
2018
On June 1, received dividend from G Company of $2.10 per share (shares purchased on January 2, 2017).
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
June 1 | Cash | 63,000 | ||
Long-Term Investments | 63,000 | |||
(To record dividend on investment) |
Table 4
- Cash is also an asset account. Since, cash is received, balance of assets has increased. Hence, Cash account is debited.
- Long-Term Investments is an asset account. Since earnings are already recorded on long-term investments, balance debited to long-term investment as earnings should be transferred to cash. So, credit Long-Term Investments account.
Working note
Computation of dividend:
On December 31, record earnings from investment on basis of net income of the company.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
December 31 | Long-Term Investments | 234,250 | ||
Earnings from Investments | 234,250 | |||
(To record dividend on investment) |
Table 5
- Long-Term Investments is an asset account. Since earnings are earned on long-term investments, balance of assets has increased. So, debit Long-Term Investments account.
- Earnings from Investment is a revenue account. The portion of net income related to equity will be treated as earnings, balance of revenue has increased. So, credit the Earnings from Investments account.
Working note
Computation of equity earnings:
On December 31, 10,000 shares of G Company are sold for $320,000.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
December 31 | Cash | 233,083 | ||
Long-Term Investments | 320,000 | |||
Gain on Sale of Investment | 86,917 | |||
(To record sale of long-term investment) |
Table 6
- Cash is also an asset account. Since, cash is received, balance of assets has increased. Hence, Cash account is debited.
- Long-Term Investments is an asset account. Since, investment is sold, balance of assets has decreased. So, credit Long-Term Investments account.
- Gain on Sale of Investment is a revenue account. Since, investment is sold at high rate than actual cost, balance of revenue has increased. So, credit the Gain on Sale of Investment account.
Working note
Book value of securities:
Actual cost of 10,000 shares:
Gain on sale of 10,000 shares:
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Chapter C Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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