[Anonymous]

During Year 1, Wall Co. purchased 2,000 shares of Hemp Corp common stock for $31,500 as a trading investment. The market value of this investment was $29,500 at December 31, Year 1. Wall sold all of the Hemp common sock for $14 per share on December 15, year 2 incurring $1400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss in its income statement of:

A. $2,900

B. $3,500

C. $4,900

D. $1,500

I chose D…the correct answer is A. However, here is my rationale…

I understand that you write down the investment at the end of Year 1 to $29,500. So the entry to sell is as follows, at least in my burnt out brain:

Db – Commissions and taxes exp $1,400

Db – Cash $28,000

Db – Loss $1,500

Cr – Investment in Hemp Corp $29,500

Cr – Cash $1,400

I’m simply netting the cash out to record the sale and the subsequent payment of the commissions and taxes, aren’t I? What’s left is clearing out the investment account, recording the cash, and plugging the loss.

I understand how Becker gets the final answer, but I’m not understanding why. I really hate FAR. 🙁

Thanks all.

[misanthrope87]

Well the way I see it is:

The value of the stock when you sold it is 29,500. But you only got 14 dollars per share (28,000). So there's a loss of 1500, and if you include the expense of 1,400, that's a total loss of 2,900.

Cash received 28000

Original investment 29500

Loss = 1500

Expense= 1400(which increases your loss)

Total Loss= 2900

B 2/12 87
A 11/11 90
R 8/11 86
F 5/12 88

[Anonymous]

@misanthrope87 – You see it the same way Becker sees it. And to be honest…I see it that way as well. i am just struggling with the why because I feel like netting the cash has the same effect.

Or maybe my brain is just fried and not allowing me to think clearly…

Thanks for the response.

[misanthrope87]

Yeah you should net the cash in the journal entry to record the transaction. Maybe becker is not netting it so that it's more clear. Is that what you have a question about? But yes, I would net cash for the journal entry.

B 2/12 87
A 11/11 90
R 8/11 86
F 5/12 88

[Anonymous]

Remember: Trading securities G/L are based on adjusted cost while Available for Sale securities G/L are based on original amount.

Since this deals with trading securities, calculate G/L based on FV amt at end of year: $29,500 ($14.75 share). Wall sold it for $14, thus creating loss of $.75 x 2000 shares = $1500 (add additional expense of $1400) ending with total realized loss of $2900.

If your brain's fried, take a break, and do the questions again. Seriously, even 10mins break helps clear your mind. I start making silly mistakes when I'm tired, but after 15mins or so…it clicks. FAR is overwhelming:(

[Author]

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