Question

Marketable securities purchased on June 1, 2015, for $85,000 were valued at $80,000 on December 31, 2015. The securities were sold at the beginning of 2016 for $83,000. The 2016 income statement should report a(n):

Option 1: Realized loss of $2,000.
Option 2: Realized gain of $3,000.
Option 3: Unrealized loss of $5,000 and a realized gain of $3,000.
Option 4: Unrealized gain recovered of $3,000.

Answer 1

The 2016 income statement should report a realized loss of $2,000 because the securities were bought for $85,000 and sold for $83,000, realizing a loss upon the sale.

Step-by-step explanation:

The income statement for 2016 should report a realized loss of $2,000. The securities were purchased for $85,000 and sold for $83,000, which results in a loss because the selling price is less than the purchase price. The value at the end of 2015 ($80,000) is not relevant to the realized gain or loss when calculating the income statement for 2016, since it represents an unrealized loss which would have been relevant for the 2015 financial statement. When the securities are sold, the loss or gain becomes realized. Therefore, the correct answer is Option 1: Realized loss of $2,000.

In this scenario, the student purchased marketable securities for $85,000 on June 1, 2015, but their value decreased to $80,000 on December 31, 2015. The securities were then sold for $83,000 at the beginning of 2016. In terms of accounting for this transaction, the 2016 income statement should report a realized loss of $2,000.