Question

Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2013 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2014, and $300 on December 31, 2015. During 2016, Dim sold all of its Witt stock at $350 per share. In its 2016 income statement, Dim would report:
a. A loss on the sale of investments of $450,000.

b. A realized gain of $50,000.

c. A trading gain of $50,000 and an unrealized loss of $500,000.

d. A recognition of unrealized losses of $400,000.

Answer 1

Answer:

The correct option is A, a loss on the sale of investments of $450,000

Explanation:

In the income for 2016, Dim Corporation would record a loss on the sale of investment shown as :

Proceeds from sale of investment($350*1000)  $350,000

Cost of investment  ($800*1000)                         ( $800,000)

Loss on sale of investment                                   ($450,000)

Option B is wrong as the price of the share has crashed from initial $800 to $350

Option C  is also wrong because since the purchase of the investments prices have crashed rather than appreciate, hence no gain is recorded

Option D is wrong because the losses are now realized to the tune of $450,000 and not $400,000