Journal entry for the purchase of marketable securities:
When marketable securities are purchased, marketable securities account is debited and cash account is credited. The transaction is recorded at cost including any brokerage commission paid to acquire the securities.
The journal entry will be made as follows:
Fine company purchases 5,000 shares of Eastern company for short-term investment at the rate of $45.50 per share on December 1, 2015. It also pays a brokerage commission of $100 for the purchase of these shares.
Required: Prepare a journal entry to record the purchase of these shares.
Notice that the per share cost ($45.52) has been computed after adding the brokerage commission ($100) to the total cost of shares ($227,500). This per share cost basis will be used to calculate any gain or loss at the time of sale of these shares.
Marketable securities account is a control account. If Fine company purchases shares of another company, it will record a similar entry (i.e., marketable securities will be debited and cash will be credited). A marketable securities subsidiary ledger account will however be required to enter the record of securities of each company.
Impact on statement of cash flows:
The cash used to purchase marketable securities is classified as investing cash outflow and is reported in the investing activities section of statement of cash flows.