Arizona State University (ASU) ACC232 Financial Accounting I Exam 2 Practice

When purchasing shares of stock, including any brokerage fees, the appropriate journal entry reflects the acquisition of the investment and the payment made. The entry involves debiting the Equity Investments account to represent the increase in the asset since the shares of stock are an investment for the company. This signifies that the firm now holds ownership stakes in another company.

The cash account is credited in this transaction because cash is being used to purchase the stock, which reduces the cash available to the company. This properly records the outflow of resources used to acquire the stock.

Including the brokerage fees as part of the investment cost is crucial because these costs are considered part of the total investment in the shares. Therefore, the entry captures the complete picture of the transaction, correctly reflecting both the asset being acquired and the cash spent. This practice aligns with the accounting principles that mandate investments be recorded at their total cost, including any fees incurred during the purchase.