Final answer:
Nichols Enterprises should carry the Elliott investment on its balance sheet at the market price of $10 a share as per fair value accounting principles, not at their internal estimate of $12 a share. Examples show how net profit from stock transactions is calculated considering initial purchase price, current price, and transaction fees.
Step-by-step explanation:
Nichols Enterprises should carry the Elliott investment on its balance sheet at the quoted market price of the shares on the stock exchange, which is $10 a share. According to accounting principles, specifically the fair value measurement, the value of securities that are available for sale must be recorded at their fair market value, not at an internally estimated price. Therefore, even if Nichols believes the shares are undervalued, they must report the investment based on the current market quote.
Let's examine a few examples to understand how the net profit from stock transactions is calculated, assuming these were similar transactions made by Nichols Enterprises:
- Purchased shares of Nike: 1000 shares at $24.50 per share, current price is $39.75 per share. The net profit is calculated as (1000 shares * $39.75) - (1000 shares * $24.50) - $9.99 transaction fee, which equals a significant profit.
- Purchased shares of Panda Express: 800 shares at $13.50 per share, current price is $23.25 per share. Similar calculation as above, resulting in a net profit after subtracting the purchase cost and a $10 transaction fee.
- Purchased shares of Wal Mart: 1200 shares at $35.50 per share, current price is $58.75 per share. Again, calculate the net profit minus the original cost and a $12.99 transaction fee for the final profit amount.