In March of 2010, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for $450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2010. Moon changed the classification of these shares to trading securities in June of 2011 when the market value of this investment in McMahon's stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2011?

Question

Quizplus · Accepted Answer

When Moon Corp. bought the 45,000 shares of McMahon Corp.'s listed stock for $450,000 and classified them as available-for-sale securities, the company did not include any loss in its determination of net income for 2010 because the decline in market value was considered temporary.

However, when Moon changed the classification of these shares to trading securities in June of 2011, it meant that the company intended to sell these shares in the near future. Therefore, the decline in market value was no longer considered temporary, and the company had to recognize a loss on transfer of securities.

To calculate the loss, we need to compare the cost of these shares (which is $450,000) with the fair value of these shares at the time of transfer (which is $345,000). The difference between the cost and fair value is $105,000, which is the amount of loss that Moon should include in its determination of net income for 2011. Therefore, the best choice is C.