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On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of the Lucas Company. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee.Required:Prepare the journal entries for the original purchase, dividend, and sale. Refer to the Chart of Accounts for exact wording of account titles.

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Answer:

The Journal entries are as follows:

(a) On February 12,

Investment in equity A/c   Dr.  $132,240

To cash A/c                                              $132,240

(To record the original purchase)                  

working:

cost of investment recorded = [(6,000 × 22) + 240]

                                                = $132,240

(b) On August 22,

Cash A/c                       Dr. $2,520

To Dividend income                         $2,520

(To record the dividend income)

Working:

Dividend received = 6,000 × $0.42

                               = $2,520

(c) On November 10,

cash [(4000 × 28) - 160) A/c                      Dr.    $111,840

To Investment in equity [132,240 × 4000/6000]                  $88,160  

To Gain on sale of investment                                               $23,680

(To record the investment sold)

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