- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 3. Financial Instruments: Financial Assets and Financial Liabilities
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. |