On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include a

A) debit to Cash, $111,840
B) credit to Investments-Lucas Company Stock, $112,000
C) credit to Loss on Sale, $23,680
D) debit to Cash, $112,000

Question

ismail soliman · Accepted Answer

Final Answer : A, Explanation :  BThe sale of 4,000 shares at $28 per share equals $112,000, but you must subtract the $160 brokerage fee, resulting in $111,840 received in cash (A). The original purchase of 6,000 shares at $22 per share plus a $240 brokerage fee totals $132,240. The cost basis for the 4,000 shares sold is $88,160 (4,000 shares * $22 per share = $88,000; plus the proportionate share of the brokerage fee, which is $160, making the total cost $88,160). The credit to Investments-Lucas Company Stock for the 4,000 shares sold would be based on their cost, which is $88,160, not $112,000 as option B suggests. Therefore, B is incorrect based on the explanation but was initially listed due to an error in interpreting the question. The correct entry for the sale would indeed involve debiting Cash for the amount received from the sale after fees (A) and crediting the Investments account for the cost basis of the shares sold, which would not be $112,000 as stated but rather the cost basis of the shares sold. The error in the initial response was in the interpretation of option B, which incorrectly suggested crediting the investment account for the sale proceeds rather than the cost basis of the shares sold.

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