Question

On December 20, 2016, a company pays $40,000 for a stock, classified as a trading security. On December 31, 2016, the company’s year-end, the stock has a market value of $38,000. The company sells the stock in 2017 for $43,000.

On its income statement, the company reports:

a: no gain or loss in 2016, and gain of $5,000 in 2017

b. A gain of $3,000 in 2016, and no gain or loss in 2017

c.No gain or loss in 2016, and gain of 3,000 in 2017.

d. A loss of $2,000 in 2016, and a gain of $5,000 in 2017.

Answer 1

Based on the information available in the question, the correct answer is

The correct answer is Option D - A loss of $2,000 in 2016, and a gain of $5,000 in 2017. Generally, trading securities are considered as current assets and found within the Assets side of the balance sheet. Any changes in the market value of the tradings securities are calculated accordingly and reported at the market value to reflect the active market prices. Hence, the changes in values of such securities should be reflected through the calculation of profit or loss within the income statement. Since there is a decline of the market value of trading securities by $2,000 ($40,000 - $38,000) between 2016 and 2017 and a subsequent increase of $5,000 ($43,000 - $38,000) during 2017, the company recognizes a gain of $5,000 in 2017. As such, this is the correct answer.

Optio A is incorrect. A loss of $2,000 needs to be recorded for the decline in the market value of the asset. Hence, this option is incorrect.

Option B is incorrect. There is no gain during the 2016 tax year as the market value has declined.

Option C is incorrect as there is a gain/loss during both 2016 and 2017 which needs to be reported accordingly.

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