Question

A company has shares in 3M Company stock that it originally bought for $100,000. On 3/31/2013, this investment was valued at $130,000 on the balance sheet. On 4/4/2013, the company sells the stock for $110,000. The company accounts for this investment using the Trading Securities method.

How will this transaction show up on the income statement?
a. Loss on the sale of investments of $20,000
b. Loss on the sale of investments of $10,000
c. Gain on the sale of investments of $20,000
d. Gain on the sale of investments of $10,000
e. It will not affect the income statement

Answer 1

Answer:

Company A

On the income statement, this transaction will show up as:

a. Loss on the sale of investments of $20,000

Explanation:

a) Data and Analysis:

Original cost of shares in 3M Company =          $100,000

Investment value on 3/31/2013 =                          130,000

Increase in investment value (Unrealized gain) = 30,000

Sales proceeds for the investment  =                   110,000

The unrealized gain of $30,000 is now reduced to a reduced gain of $10,000.  The net effect is a loss on the sale of the investments of $20,000 ($30,000 - $10,000).