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Basic Question 2 of 11
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?
B. $7,500 realized gain
C. $7,500 unrealized gain
A. $4,875 credit to stockholder's equity
B. $7,500 realized gain
C. $7,500 unrealized gain
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 |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain the financial reporting and disclosures related to financial instruments
CFA® 2025 Level I Curriculum, Volume 2, Module 3.