Journalize the stock investment transactions under the cost method.
Explanation of Solution
Stock investments: Stock investments are equity securities which claim ownership in the investee company and pay dividend revenue to the investor company.
Fair value method: Fair value method is an accounting method used for accounting stock or equity investments which claim less than 20% of the outstanding stock of the investee company.
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 4,000 shares of Company A at $50 price per share and a brokerage of $400.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
September | 12 | Investments–Company A Stock (1) | 200,400 | ||
Cash | 200,400 | ||||
(To record purchase of shares of Company A for cash) |
Table (1)
- Investments–Company A stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Note (1):
Compute amount of cash paid to purchase Company A’s stock.
Prepare journal entry for the dividend received from Company A for 4,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
October | 15 | Cash | 2,400 | ||
Dividend Revenue (2) | 2,400 | ||||
(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 Note (2):
Compute amount of dividend received on Company A’s stock.
Prepare journal entry for sale of 3,000 shares of Company A at $40 per share, and a brokerage of $200.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
November | 10 | Cash (3) | 119,800 | ||
Loss on Sale of Investments (5) | 30,500 | ||||
Investments–Company A stock (4) | 150,300 | ||||
(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.
- Loss on Sale of Investments is an expense account. Since expense decrease equity, equity value is decreased, and a decrease in equity is debited.
- Investments–Company T stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Note (3):
Compute cash received from sale proceeds.
Working Note (4):
Compute cost of stock investment sold.
Working Note (5):
Compute realized gain (loss) on sale of stock.
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Chapter D Solutions
Financial And Managerial Accounting
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