Investment of stock cost method | Cheri Bergeron | YouTubeToText
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okay now let's talk about how to account
for an investment in stocks so when
you're doing this you'll need to look
and see which method you'll be using and
you'll do that by looking at the
ownership percentage and for this
problem we're going to assume that we
own less than 20% of the stock that
we're buying of the company stock that
we're buying so we're going to account
for it by the cost method which just
means that we're going to report this at
cost when we buy it any dividends that
we receive we're going to record as
Revenue when we go to sell we're going
to sell it um and recognize a gain or a
loss on sale of investment so this is if
we don't exhibit any control over the
company that we're buying because we own
less than 20% of it here's how it's
going to work on February the 10th we
purchased 15,000 shares of Toby company
at a price of
$25 plus we paid $150 for a brokerage
commission fee so that means that we
bought 15,000 shares
at $25 per share for a total If I
multiply across of
$375,000 we have to add our brokerage
Commission of $150 to find out how much
we pay and how much we're going to put
this investment on our books at so it
goes under investment that's an asset
account because we're holding it for
sale so investment of Toby Company stock
I'm going to debit for the full price
including that brokerage commission $375,900
$375,900
and I bought it using cash so I will
show that my cash went down by the same
amount that is purchasing it using the
cost method next I'm going to receive
dividends on April the 12th I received a
40 Cent per share dividend so that means
that I received money and I received 40
cents time times the number of shares
that I own 15,000 shares so I received
cash dividend of
$6,000 under the cost method I record my
revenue on May 29th I decide to sell
some of my shares I'm going to sell
6,000 of my shares so I need to figure
out how much I originally paid for those
so that I can compare how much I'm
selling them for so I can decide if I
have a gain or a loss so my original
price was
375,000 I divide that that by the number
of shares that I originally purchased
and I find out that with that brokerage
fee included I paid
$251 for these shares so now that I'm
going to sell some of them I'm going to
say 6,000 shares that's how many I'm
selling times this $25 and 1 cent so my
original purchase price which is now how
much I'm selling is
50,60 all right so I'm going to be
getting rid of that so it's called
investment Toby Company stock I'm going
to credit that because I'm selling it so
50,60 whenever I sell something I get
cash I call that proceeds let's see how
we calculate how much proceeds I got
from this sale so it tells me that I
sold 6,000 shares for
$32 less $120 brokerage commission so I
had to give that to um The Brokerage fee
so what I will do is I will say 6,000
shares that I sold times the $32 per
share that I sold it for and I'll
subtract Out The Brokerage fee that went
to pay for this transaction so when I do
when I compare my original purchase
price of the 6,000 shares to the amount
that I got for selling the 6,000 then I
can see that my proceeds is greater than
my price which means I have a gain and a
gain has a normal credit balance gains
work just like revenues do so they have
normal credit balance so I'll need to
put it in as a credit
41820 so before I move on I'll make sure
that my debits equal my credits my total
debits for this journal entry equal
19188 my total credits also equal 191
880 so I am in Balance so that is how
you account for the purchase of a stock
investment under the cost method as well
as receipt of dividend and then um a
sale of part of your shares of stock all
under the cost method so let me know if
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