Question

On August 1, Masters Company buys 2000 shares of ABD common stock for $72500 cash. On December 1, the stock investments are sold for $75000 in cash. Which of the following are the correct journal entries to record for the purchase and sale of the common stock?
(a) Aug. 1 Cash 72500 Stock Investments 72500 Dec. 1 Cash 75000 Stock Investments 72500 Gain on Sale of Stock Investments 2500
(b) Aug. 1 Stock Investments 72500 Cash 72500 Dec. 1 Cash 75000 Stock Investments 72500 Gain on Sale of Stock Investments 2500
(c) Aug. 1 Cash 72500 Stock Investments 72500 Dec. 1 Stock Investments 75000 Cash 72500 Gain on Sale of Stock Investments 2500
(d) Aug. 1 Stock Investments 72500 Cash 72500 Dec. 1 Stock Investments 75000 Cash 72500 Gain on Sale of Stock Investments 2500

Answer 1

Answer:

The answer is: B) Aug. 1 Stock Investments 72500 Cash 72500 Dec. 1 Cash 75000 Stock Investments 72500 Gain on Sale of Stock Investments 2500

Explanation:

The capital gains can be calculated by the difference between the selling price minus the buying price:

Capital gains = $75,000 - $72,500 = $2,500

On August 1, cash should be credited (asset decrease) and stock investments should be debited (asset increase)  

• Dr Stock Investments 72,500
• Cr Cash 72,500

On December 1, cash should be debited (asset increase), stock investments should be credited (asset decrease) and gain on sale of stock should be credited (revenue).  

• Dr Cash 75,000
• Cr Stock Investments 72,500
• Cr Gain on Sale of Stock Investments. 2,500