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Chapter 15: Problem 6

The following equity investment-related transactions were completed by Lance Company in 2010: Jan. 12. Purchased 1,800 shares of Baxter Company for a price of \(\$ 56.50\) per share plus a brokerage commission of \(\$ 90\). Apr. 10. Received a quarterly dividend of \(\$ 0.25\) per share on the Baxter Company investment. June 3. Sold 1,200 shares for a price of \(\$ 46\) per share less a brokerage commission of \(\$ 65\). Journalize the entries for these transactions.

Short Answer

Expert verified
Lance Company purchased shares for \$101,790, received dividends of \$450, and sold shares at a loss of \$12,665.

Step by step solution

01

Calculate the Total Cost of Purchase on January 12

First, determine the total cost of purchasing the shares. Multiply the number of shares (1,800) by the price per share (\\(56.50) to find the cost of the shares. Then, add the brokerage commission to find the overall cost.Cost of shares = 1,800 shares \times \\)56.50 = \\(101,700Total cost = \\)101,700 + \\(90 (brokerage commission) = \\)101,790
02

Record the Journal Entry for the Purchase

Record the transaction in the journal entries. Debit the 'Investment in Baxter Company' to reflect the asset increase and credit 'Cash' to reflect the cash outflow.- Debit 'Investment in Baxter Company' with \\(101,790- Credit 'Cash' with \\)101,790
03

Calculate the Dividend Received on April 10

Calculate the total dividend received by multiplying the number of shares owned (1,800) by the dividend per share (\\(0.25).Dividend received = 1,800 shares \times \\)0.25 = \$450.
04

Record the Journal Entry for the Dividend

Record the dividend received. Debit 'Cash' to reflect the cash inflow and credit 'Dividend Revenue'.- Debit 'Cash' with \\(450- Credit 'Dividend Revenue' with \\)450
05

Calculate the Proceeds from the Sale on June 3

Determine the cash received from selling 1,200 shares by multiplying the number of shares by the price per share (\\(46). Subtract the brokerage commission from this amount.Proceeds from sale = (1,200 shares \times \\)46) - \\(65 = \\)55,135.
06

Record the Journal Entry for the Sale

Record the sale of shares. Debit 'Cash' with the net proceeds, credit 'Investment in Baxter Company' for the cost of 1,200 shares (calculated as the proportion of the total cost), and record any difference as a gain or loss.- Cash received = \\(55,135- Cost of 1,200 shares = \[(1,200/1,800) \times \\)101,700 = \\(67,800\]- Determine gain/loss: \\)55,135 - \\(67,800 = \\)-12,665 (loss)- Debit 'Cash' with \\(55,135- Credit 'Investment in Baxter Company' with \\)67,800- Debit 'Loss on Sale of Investments' with \$12,665
07

Concluding the Journal Entries

After recording all transactions, verify the entries for accuracy and confirm that debits equal credits to ensure that the transactions have been recorded correctly.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries
In accounting, journal entries are essential for recording financial transactions of a business. A journal entry consists of several components:
  • Date of the transaction: Specifies when the transaction took place.
  • Accounts affected: Details which accounts are impacted (such as Cash or Investment).
  • Amounts: Shows the monetary value for each affected account, indicating whether it's a debit or a credit.
  • Description: Offers some explanation of the transaction for clarity.
For example, when Lance Company purchased shares on January 12, it created a journal entry to reflect this transaction. The company debited the 'Investment in Baxter Company' account to highlight the asset increase, and credited the 'Cash' account to indicate cash outflow. Essentially, journal entries ensure the transparency and accuracy of financial records.
Dividend Calculation
Dividends represent a portion of a company's earnings paid to shareholders. Calculating the total dividend received is crucial for both individual and corporate investors. Here's how you do it:
  • Determine the number of shares owned: This is foundational as it determines the extent of your entitled dividends. Lance Company owned 1,800 shares of Baxter Company.
  • Identify the dividend per share: Companies declare this rate, which allows shareholders to calculate their returns. For our example, each share yielded a dividend of \(0.25.
  • Multiply the shares by the dividend per share: Conduct this simple multiplication to find the total dividend. Hence, 1,800 shares multiplied by \)0.25 per share resulted in a dividend of 450.00.
Once calculated, companies record this inflow by debiting the 'Cash' account and crediting the 'Dividend Revenue' account, reflecting the increase in cash and income.
Investment Transactions
Investment transactions, including buying and selling shares, impact a company's financial standing significantly. This requires precision in records:
  • Buying shares: Involves costs like the purchase price and brokerage commissions. For instance, Lance Company bought shares and accounted for both the share price and commission in its journal entry.
  • Receiving dividends: As discussed, dividends provide periodic income from investments. They are recorded to reflect cash inflows and revenue.
  • Selling shares: This involves determining the proceeds, which is the total value minus any costs, such as brokerage fees. Lance Company sold some of their shares and calculated the exact net cash received from this sale. Proceeds were derived after accounting for commissions.
Furthermore, assessing gains or losses from investment sales is vital. This is essentially the difference between the sale proceeds and the cost of shares sold. Recording these gains or losses ensures the accuracy of financial statements, reflecting the company's true financial health.

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Most popular questions from this chapter

The investments of Commerce Bank Inc. include 12,000 shares of RadTek Inc. common stock purchased on February 21, 2010, for \(\$ 16\) per share. These shares were classified as trading securities. As of the December 31, 2010, balance sheet date, assume that the share price increased to \(\$ 21\) per share. As of the December 31,2011 , balance sheet date, assume that the share price declined to \(\$ 20\) per share. The investment was held through December 31, \(2011 .\) a. Journalize the entries to record the adjustment of the RadTek Inc. investment to fair value on December 31, 2010, and December 31, \(2011 .\) b. Where is the unrealized gain or unrealized loss for trading investments disclosed on the financial statements?

During 2010, Toney Corporation held a portfolio of available-for-sale securities having a cost of \(\$ 190,000\). There were no purchases or sales of investments during the year. The market values at the beginning and end of the year were \(\$ 225,000\) and \(\$ 180,000\), respectively. The net income for 2010 was \(\$ 175,000\), and no dividends were paid during the year. The Stockholders' Equity section of the balance sheet was as follows on December 31,2009 : \begin{tabular}{lr} \multicolumn{3}{r}{ Toney Corporation Stockholders' Equity December 31, 2009 } \\\ \hline \end{tabular} Prepare the Stockholders' Equity section of the balance sheet for December 31, \(2010 .\)

Plumbline Tech Corp. manufactures surveying equipment. Journalize the entries to record the following selected equity investment transactions completed by Plumbline during 2010: Feb. 2. Purchased for cash 900 shares of Devon Inc. stock for \(\$ 54\) per share plus a \(\$ 450\) brokerage commission. Apr. 16. Received dividends of \(\$ 0.25\) per share on Devon Inc. stock. June 17. Purchased 600 shares of Devon Inc. stock for \(\$ 65\) per share plus a \(\$ 300\) brokerage commission. Aug. 19. Sold 1,000 shares of Devon Inc. stock for \(\$ 70\) per share less a \(\$ 500\) brokerage commission. Plumbline assumes that the first investments purchased are the first investments sold. Nov. 14. Received dividends of \(\$ 0.30\) per share on Devon Inc. stock.

On May 1, 2010, Carly Company purchased \(84,000 of 5%, 12-year Baltimore Company bonds at par plus 2 months鈥� accrued interest. The bonds pay interest on March 1 and September 1. On October 1, 2010, Carly Company sold \)30,000 of the Baltimore Company bonds acquired on May 1, plus one month accrued interest. On December 31, 2010, four months鈥� interest was accrued for the remaining bonds. Determine the interest earned by Carly Company on Baltimore Company bonds for 2010.

Corvis Company's balance sheet disclosed its long-term investment in Mid- American Company under the equity method for comparative years as follows: \begin{tabular}{lcc} & Dec. 31, 2011 & Dec. 31, 2010 \\ \hline Investment in Mid-American Company stock (in millions) & \(\$ 98\) & \(\$ 90\) \end{tabular} In addition, the 2011 Corvis Company income statement disclosed equity earnings in the Mid-American Company investment as \(\$ 10\) million. Corvis Company neither purchased nor sold Mid-American Company stock during 2011. The fair value of MidAmerican Company stock investment on December 31, 2011, was \(\$ 107\). Explain the change in the Investment in Mid-American Company Stock balance sheet account from December 31, 2010, to December 31, \(2011 .\)
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