Asked by Heena Munshi on Jun 25, 2024
Verified
On October 1 of last year, Hand Tools Corp.purchased 1,500 shares of the Bindo Bank for $72,000 as a trading investment.At year end, December 31, the fair value of these shares was $75,000.On February 1 of this year, Hand Tools sold all these shares for $73,000.The realized gain (loss) that Hand Tools will report this year is
A) a gain of $2,000.
B) a gain of $1,000.
C) a loss of $1,000.
D) a loss of $2,000.
Trading Investment
A trading investment refers to securities bought and held primarily for selling them in the near term with the aim of profiting from short-term price fluctuations.
Realized Gain
A profit that results from selling an asset at a higher price than its purchase cost, officially recognized when the asset is sold.
Fair Value
The estimated price at which an asset could be bought or sold in a current transaction between willing parties, other than in a liquidation.
- Distinguish between actual and potential profits and losses.
- Examine the reporting obligations for trading investments, focusing on how dividends and gains/losses are handled.
Verified Answer
HJ
Hamza JavedJun 27, 2024
Final Answer :
D
Explanation :
The realized loss is calculated based on the difference between the sale price ($73,000) and the purchase price ($72,000), resulting in a loss of $1,000. However, because the shares were valued at $75,000 at year-end and then sold for $73,000, the realized loss is actually $2,000, reflecting the decrease in value from the year-end valuation to the sale price.
Learning Objectives
- Distinguish between actual and potential profits and losses.
- Examine the reporting obligations for trading investments, focusing on how dividends and gains/losses are handled.