CFA Practice Question

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CFA Practice Question

Crosscreek Corporation bought shares of Royal Corporation's common stock with a cost of $100,000 on July 15, 2016. On 12/31/2016 (year-end), the Royal stock was worth $107,500. The stock is classified as a trading security. The income tax rate is 35%. Which one of the following reflects the proper treatment for Crosscreek's investment for 2016?

A. $4,875 credit to stockholder's equity
B. $7,500 realized gain
C. $7,500 unrealized gain
Correct Answer: C

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 9

User Comment
kalps No tax impact as the gain is unrealised. Gain arises as teh stock is readily marketable if it was closely held stock such a gain would not necessarily be recognised.
cbb1 Kalps, there is a tax effect on the books at the net income line, but the line item is unrealized gain. The reason the unrealized gain is recognized is that it is a trading security.
danlan2 So the answer should be $4875 realized gain?
yly14 it is unrealized unless investment is sold, and unless sold (realized), there are no taxes. And danlan2: 7500 unrealized gain is not equal to 4875 realized gain.
danlan2 Even if it is trading security, unrealized if it's not sold.
MattyBo Unrealized gain for trading securities also reported on statement of owner's equity as impacts retained earnings. Taxes when gain is realized.
johntan1979 The income tax rate is a distraction. Should be capital gains tax rate if realized.
ashish100 ^ this guy's wrong. should be taxed as regular income if realized since it was held for less than a year.

Google to double check.
Inaganti6 johntan1979 you make me feel bad
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