Stock investments: Stock investments are equity securities which claim ownership in the investee company and pay a dividend revenue to the investor company.
Fair value method: Fair value method is the accounting method used for accounting stock or equity investments which claim less than 20% of the outstanding stock of the investee 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 under the fair value method

Explanation of Solution
Prepare journal entry for the purchase of 4,000 shares of Company A at $50 price per share and a brokerage of $400.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
September | 12 | Investments–Company A Stock | 200,400 | ||
Cash | 200,400 | ||||
(To record purchase of shares of Company A for cash) |
Table (1)
Description:
- Investments–Company A Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company A’s stock.
Prepare journal entry for the dividend received from Company A for 4,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
October | 15 | Cash | 2,400 | ||
Dividend Revenue | 2,400 | ||||
(To record receipt of dividend revenue) |
Table (2)
Description:
- 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 A’s stock.
Prepare journal entry for sale of 3,000 shares of Company A at $40 per share, and a brokerage of $200.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
November | 10 | Cash | 119,800 | ||
Loss on Sale of Investments | 30,500 | ||||
Investments–Company A Stock | 150,300 | ||||
(To record sale of shares) |
Table (3)
Description:
- 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 an expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Investments–Company A 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 Refer to Table (1) for value of cost of 4,000 shares.
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.
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Chapter D Solutions
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