Seeing is believing!
Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.
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 am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
explain the financial reporting and disclosures related to financial instruments
CFA® 2024 Level I Curriculum, Volume 2, Module 3.