In March of 2013,Mars Corp.bought 45,000 shares of Elite 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 31,2013.Mars changed the classification of these shares to trading securities in June of 2014 when the market value of this investment in Elite's stock had risen to $345,000.How much should Mars include as a loss on transfer of securities in its determination of net income for 2014?

Question

Quizplus · Accepted Answer

When Mars Corp. initially bought the 45,000 shares of Elite Corp.'s listed stock in March of 2013 for $450,000, they classified the shares as available-for-sale securities. By December 31, 2013, the market value of the shares had declined to $300,000. Therefore, Mars had an unrealized loss of $150,000 ($450,000 - $300,000) at the end of 2013.

In June of 2014, the market value of the investment in Elite's stock rose to $345,000, and Mars changed the classification of the shares to trading securities. When a company classifies a security as trading, they are required to recognize the unrealized gain or loss in net income.

Since Mars had an unrealized loss of $150,000 at the end of 2013 and recognized a $45,000 unrealized gain ($345,000 - $300,000) in 2014, the net loss on the transfer of securities would be $105,000 ($150,000 - $45,000). Therefore, Mars should include $105,000 as a loss on transfer of securities in its determination of net income for 2014.