On December 20, 2016, a company pays $40,000 for a stock, classified as a trading security....

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.

Solutions

Expert Solution

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.

Please let me know if you have any questions via comments and all the best :) !

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Moutainbrook Company stock is is currently trading at $44 per share. The stock pays no dividends....

Moutainbrook Company stock is is currently trading at $44 per share. The stock pays no dividends. The standard deviation of the returns on the stock is 55%. The continuously compounded interest rate is 6% per year. A three-year European call option on Mountainbrook stock has a strike price of $50 per share. Using the Black-Scholes-Merton model, find the premium per share to four decimal places.

Question #3: Rosenberg, Inc. has the following classified as trading securities at the end of December,...

Question #3: Rosenberg, Inc. has the following classified as trading securities at the end of December, 2017. Cost Fair Value Goldberg$ 20,000$ 19,000 Silverberg$9,500 $8,800 T Berg$ 20,000$ 20,600 During 2018 the company sold its Silverberg stock for $9,200 and recorded a $400 gain on sale. At the end of December 2018, the market values of Goldberg and T Berg were $19,900 and $20,500 respectively. (a) How should these securities be valued on the December 31, 2017 balance sheet? Why?...

A stock is currently trading at $20. The call option at $20 strike price for September...

A stock is currently trading at $20. The call option at $20 strike price for September 2020 costs $1 per share while the September put at $20 strike price costs $.50 per share. a) What’s a straddle strategy for this stock; b) Explain the risk and reward as stock price goes up to more than $22 ; c) Explain the risk and reward as stock price trades below $21.

On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 40,000 shares...

On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 40,000 shares of 6%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Jackson purchased 34,000 shares of common stock on the open market as treasury stock for $45 per share. Jackson sold 7,000 treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $190,905. Also outstanding during the year were fully vested incentive stock options giving key executives the...

Monique’s Trading Company balance sheet at December 31, 2016, reported the following: Accounts receivable...........................................$1,000,000 Allowance for...

Monique’s Trading Company balance sheet at December 31, 2016, reported the following: Accounts receivable...........................................$1,000,000 Allowance for uncollectible accounts...................$33,330 The following are the transactions to be taken into consideration for 2017: a. Total credit sales for 2017 were $2,400,000. b. 2% of sales were estimated to be uncollectible. c. The company received cash payments on account during 2017 for $900,000 d. Accounts receivable identified to be uncollectible totaled $64,000. e. December 31, 2017, aging of receivables indicates that $72,000 of the...

Suppose Amazon stock is trading for $ 535 per share, and Amazon pays no dividends. a....

Suppose Amazon stock is trading for $ 535 per share, and Amazon pays no dividends. a. What is the maximum possible price of a call option on Amazon? b. What is the maximum possible price of a put option on Amazon with a strike price of $ 590? c. What is the minimum possible value of a call option on Amazon stock with a strike price of $ 500? d. What is the minimum possible value of an American put...

A company purchases a salesman a car for $40,000; the salesman pays $2,000 for an upgraded...

A company purchases a salesman a car for $40,000; the salesman pays $2,000 for an upgraded sound system to make his time on the road more pleasant. The car has an expected salvage value of $2,000 and an expected life of 4 years or 200,000 miles. During the first year the car was driven 45,000 miles, during the second year 40,000 miles and 50,000 miles the 3rd year Please show the annual depreciation expense for years 1, 2, 3 using...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par value, 100,000 shares authorized, 45,000 shares issued and outstanding $ 900,000 Paid-in capital in excess of par value, common stock 70,000 Retained earnings 460,000 Total stockholders' equity $ 1,430,000 In year 2017, the following transactions affected its stockholders’ equity accounts. Jan. 1 Purchased 4,000 shares of its own stock at $25 cash per share. Jan. 5 Directors declared a $4 per share cash dividend...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par value, 100,000 shares authorized, 55,000 shares issued and outstanding $ 1,100,000 Paid-in capital in excess of par value, common stock 70,000 Retained earnings 430,000 Total stockholders' equity $ 1,600,000 In year 2017, the following transactions affected its stockholders’ equity accounts. Jan. 1 Purchased 4,500 shares of its own stock at $20 cash per share. Jan. 5 Directors declared a $2 per share cash dividend...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par...

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2016: Common stock—$20 par value, 100,000 shares authorized, 40,000 shares issued and outstanding $ 800,000 Paid-in capital in excess of par value, common stock 70,000 Retained earnings 460,000 Total stockholders' equity $ 1,330,000 In year 2017, the following transactions affected its stockholders’ equity accounts. Jan. 1 Purchased 5,500 shares of its own stock at $20 cash per share. Jan. 5 Directors declared a $2 per share cash dividend...

Subjects