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 ACCT.FUND.(LOOSELEAF)
- 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 . 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_forwardEntries for Investment in Stock, Receipt of Dividends, and Sale of Shares The following equity investment transactions were completed by Romero Company during a recent year: Apr. 10. July 8. Purchased 1,800 shares of Dixon Company for a price of $57.75 per share plus a brokerage commission of $450. Received a quarterly dividend of $0.35 per share on the Dixon Company investment. Sept. 10. Sold 1,200 shares for a price of $52 per share less a brokerage commission of $250. Journalize the entries for these transactions. If required, round the final answers to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank. Apr. 10 - Purchase Investments-Dixon Company Stock Cash ✓ K July 8 Dividend Cash ✓ Dividend Revenue Sept. 10 Sale Cash ✓ Loss on Sale of Investments Investments-Dixon Company Stock ✓arrow_forwardFeb. 2 Purchased for cash 500 shares of Braxter Co. stock for $34 per share plus a $250 brokerage commission. Apr. 16 Received dividends of $0.35 per share on Braxter Co. stock. June 17 Sold 100 shares of Braxter Co. stock for $40 per share less a $100 brokerage commission. Required: Journalize the entries to record the above selected equity investment transactions completed by Flurry Company during the current year. Flurry’s purchase represents less than 20% of the total outstanding Braxter Co. stock. Refer to the Chart of Accounts for exact wording of account titles.arrow_forward
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