Saturday, February 9, 2013

Equity Securities: Accounting Basics for Newbies

This section explains the accounting basics for equity securities, including that for acquisition, dividends, and disposition.

Acquisition. Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. To illustrate, assume that Music City purchases 1,000 shares of Intex common stock at par value for $86,000 on October 10, 2010. It records this purchase of available-for-sale (AFS) securities as follows.

 



Dividend earned. Any cash dividends received are credited to Dividend Revenue and reported in the income statement. To illustrate, on November 2, Music City receives a $1,720 quarterly cash dividend on the Intex shares, which it records as:

 



Disposition. When the securities are sold, sale proceeds are compared with the cost, and any gain or loss is recorded. To illustrate, on December 20, Music City sells 500 of the Intex shares for $45,000 cash and records this sale as:

 

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