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 Accounting
- Forte Inc. produces and sells theater set designs and costumes. The company began operations on January 1, Year 1. The following transactions relate to securities acquired by Forte Inc., which has a fiscal year ending on December 31: Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related asset and stockholders equity balance sheet presentation for Forte Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is 389,000.arrow_forwardSelected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 20Y8, 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 8,000 shares of treasury common stock at 33 per share. G. 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. H. Paid the cash dividends to the preferred stockholders. I. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (F). J. Recorded the payment of semiannual interest on the bonds issued in (C) and the amortization of the premium for six months. The amortization is determined using the straight-line method. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 20Y8, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follow were taken from the records of Equinox Products Inc. Income statement data: Advertising expense 150,000 Cost of goods sold 3,700,000 Delivery expense 30,000 Depreciation expenseoffice buildings and equipment 30,000 Depreciation expensestore buildings and equipment 100,000 Income tax expense 140,500 Interest expense 21,000 Interest revenue 30,000 Miscellaneous administrative expense 7,500 Miscellaneous selling expense 14,000 Office rent expense 50,000 Office salaries expense 170,000 Office supplies expense 10,000 Sales 5,313,000 Sales commissions 185,000 Sales salaries expense 385,000 Store supplies expense 21,000 Retained earnings and balance sheet data: Accounts payable 194,300 Accounts receivable 545,000 Accumulated depreciationoffice buildings and equipment 1,580,000 Accumulated depreciationstore buildings and equipment 4,126,000 Allowance for doubtful accounts 8,450 Bonds payable, 5%, due in 10 years 500,000 Cash 282,850 Common stock, 20 par (400,000 shares authorized; 100,000 shares issued, 94,600 outstanding) 2,000,000 Dividends: Cash dividends for common stock 155,120 Cash dividends for preferred stock 100,000 Goodwill 700,000 Income tax payable 44,000 Interest receivable 1,200 Inventory (December 31, 20Y8),at lower of cost (FIFO) or market 778,000 Office buildings and equipment 4,320,000 Paid-in capital from sale of treasury stock 13,000 Excess of issue price over parcommon stock 886,800 Excess of issue price over parpreferred stock 150,000 Preferred 5% stock, 80 par (30,000 shares authorized; 20,000 shares issued) 1,600,000 Premium on bonds payable 19,000 Prepaid expenses 27,400 Retained earnings, January 1, 20Y8 8,197,220 Store buildings and equipment 12,560,000 Treasury stock (5,400 shares of common stock at cost of 33 per share) 178,200 A. Prepare a multiple-step income statement for the year ended December 31, 20Y8. B. Prepare a retained earnings statement for the year ended December 31, 20Y8. C. Prepare a balance sheet in report form as of December 31, 20Y8.arrow_forwardSelected 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 . In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. ( Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 20 6. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forward
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