Stock investments: Stock investments are equity securities which claim ownership in the investee company and pay a dividend revenue to the investor 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.
To journalize: The stock investment transactions in the books of Industries S
Explanation of Solution
1)
Prepare journal entry for the purchase of 1,000 shares of Company T at $85 per share and a brokerage of $150.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
February | 24 | Investments–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.
2)
Prepare journal entry for the purchase of 2,500 shares of Company I at $36 per share and a brokerage of $100.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
March | 16 | Investments–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.
3)
Prepare journal entry for sale of 400 shares of Company T at $100, with a brokerage of $75.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
July | 14 | Cash | 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.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
4)
Prepare journal entry for sale of 750 shares of Company I at $32.50, with a brokerage of $80.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
August | 12 | Cash | 24,295 | ||
Loss on Sale of Investments | 2,735 | ||||
Investments–Company I Stock | 27,030 | ||||
(To record sale of shares) |
Table (4)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Loss on Sale of Investments is a loss or expense account. Since losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Investments–Company I Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
5)
Prepare journal entry for the dividend received from Company T for 600 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
October | 31 | Cash | 240 | ||
Dividend Revenue | 240 | ||||
(To record receipt of dividend revenue) |
Table (5)
- 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 Company T’s stock.
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Chapter D Solutions
CORPORATE FINANCIAL ACCT LL W/WP NOW
- Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4, 000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 37 5. The bonds are classified as a held-to-maturity long -term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0 .60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issue d in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method . q. Accrued interest for three months on the Dream Inc. bonds purchased in (I). r. Pinkberry Co. recorded total earnings of 240 ,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39. 02 per share on December 31, 2016. The investment is adjusted to fair value , using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments h ad a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transaction s for the year ended December 31, 201 6, had been poste d [including the transactions recorded in part (1) and all adjusting entries), the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step in come statement for the year ended December 31, 201 6, concluding with earnings per share . 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