CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

On May 25th, 2016, Dove Landing Corporation bought 2,500 shares of Hunt Corporation's common stock at a total cost of $200,000. On 12/31/2016 year-end, the Hunt Corp. stock was worth $212,750. The stock is classified as a trading security. The income tax rate is 35%. Which one of the following reflects the proper treatment of Dove Landing's investment for 2016?
A. No gain or loss
B. $8,288 credit to stockholders' equity
C. $12,750 unrealized gain
Explanation: The entry's debit is to a market adjustment account added to the investment account to bring it to current value at the end of 2016.

User Contributed Comments 8

User Comment
danlan2 It's trading security, so why not realized gain?
anricus28 the gain was not crystallised/realised (asset was still owned) and so gain is unrealised
dlukas The only time a gain is realized is when the asset is sold (or in the case of a bond it reaches maturity).
Riley85 Unrealized gains on trading securities are included in NI so the answer should be B, right?
jpducros B doesn't mention NI, but Shareholder's equity.
Also I think what the question wants to show is that MTM of trading security do impact the PL.
Now I would think that there is a Deferred Tax to be accounted also in PL for 4462. Anyone ?
kazec1 The gain on the security is taxable, and the after-tax gain is part of NI, hence part of equity. Isn't that so? So why not B?
Vedo I debated between B and C but i choose C since you dont know if the money would be credited to stockholders equity, but it is definitely unrealized gain. Securities available for sale would go directly to SE.
Inaganti6 Unrealized gains on securities aren't taxed guys usually the taxes are only because there is A CAPITAL GAINS tax and in this case there isn't even a Capital Gains tax it's AN INCOME TAX. Come on why do you think Warren Buffett became the richest investor ever ? He'd have lost half his fortune to Tax alone if he played the investment world through realization of gains.
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