Central Investments bought 4,000 shares of Benet Company common stock on January

Question

Central Investments bought 4,000 shares of Benet Company common stock on January 1, 2018, for $20,000, and 4,000 shares of Roy Company common on July 1, 2018, for $24,000. Benet declared dividends on December 31, 2018 of $3,000. At the end of 2018, the fair value of Roy was $30,000 and the fair value of Benet was $28,000. At the end of 2019, the fair value of Roy was $32,000 and the fair value of Benet was $24,000. These investments are reported in the long-term asset section of Central’s balance sheet. Central owns 8% of Benet Company and 12% of Roy Company.

Assume that the Roy Company stock was sold during 2020 for $31,000. The proper accounting recognition at the date of sale was

an unrealized loss $1,000.

a realized gain of $7,000.

a realized gain of $6,000.

a realized loss of $1,000.

Explanation / Answer

Answer: a realized gain of $7,000

Since the investments are reported in the long-term asset section of Central’s balance sheet, it shows that these are considered as 'Held-to-Maturity Securities'.

So unrealized gain or loss are not recorded every year.

Calculation of Realized Gain on sale of Investment in Roy Company on date of Sale.

Investment of Roy Company sold for $31,000

Book Value of Investment $24,000

Profit on Sale of Investment $ 7,000

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