Explanation Journal entry : Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically. Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions: Debit , all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities. Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses. Prepare the journal entries for the given transactions as follows: May 9– Purchase of short-term investment Date Account Titles and Description Post Ref. Debit ($) Credit ($) May 9 Short-term investment in company H (1) 5,150 Cash 5,150 (To record purchase of short-term investment in cash) Table (1) Short-term investment in Company R is an asset account, and it increases the value of assets by $5,150. Hence, debit short-term investment account with $5,150. Cash is an asset account and it decreases the value of asset by $5,150. Therefore, credit cash account for $5,150. Working note: Calculate the value of short-term investment Short-term investment = [ ( Number of shares × Price per share ) + Brokerage fee ] = ( 200 × $ 25 per share ) + $ 150 = $ 5 , 000 + $ 150 = $ 5 , 150 (1) June 2 – Sale 100 shares for $28 per share Date Account Titles and Description Post Ref. Debit ($) Credit ($) June, 2 Cash (3) 2,710 Gain from sale of short-term investments (5) 135 Short-term investment in Company H (4) 2,575 (To record the sale of stock investment in cash) Table (3) Cash is an asset account and it increases the value of asset by $7,450. Therefore, debit Cash account for $7,450. Gain from sale of short-term investments is a component of owner’s equity, and it increases the value of equity by $2,410. Hence, credit Gain from sale of short-term investments account with $2,410. Short-term investment in Company R is an asset account, and it decreases the value of assets by $5,040. Hence, credit short-term investment account with $5,040. Working Note: Calculate the value of cash received from the sale of stock investment Cash received = ( ( Number of shares sold × Sales price per share ) − Brokerage fees ) = ( 100 × $ 28 ) − $ 90 = $ 2 , 800 − $ 90 = $ 2 , 710 (2) Calculate the purchase value of short-term investment for 100 shares Purchase value = ( Cost of investment for 100 shares Number of shares invested × Number of shares sold ) = [ $ 5 , 150 200 × 100 ] = $ 2 , 575 (3) Calculate the unrealized gain (loss) from sale of stock investment

6th Edition

ISBN: 9781259726910

Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles

Publisher: McGraw-Hill Education

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