Dreamland Corporation purchased 10,000 shares of Sleepytime,Inc.common stock for $200,000 on February 19,2016.On December 31,2016,the value of the Sleepytime stock declines to $180,000.Dreamland sells the Sleepytime stock for $170,000 on January 10,2017.Dreamland does not recognize a loss on the stock in 2016,but does recognize a loss of $30,000 in 2017.Which of the following Concepts,Constructs,and/or Doctrines form the basis for this treatment?
I.Realization Concept.
II.Related Party Provisions.
III.Capital Recovery Concept.
IV.Tax Benefit Rule.

Question

Dreamland Corporation purchased 10,000 shares of Sleepytime,Inc.common stock for $200,000 on February 19,2016.On December 31,2016,the value of the Sleepytime stock declines to $180,000.Dreamland sells the Sleepytime stock for $170,000 on January 10,2017.Dreamland does not recognize a loss on the stock in 2016,but does recognize a loss of $30,000 in 2017.Which of the following Concepts,Constructs,and/or Doctrines form the basis for this treatment?
I.Realization Concept.
II.Related Party Provisions.
III.Capital Recovery Concept.
IV.Tax Benefit Rule.
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Quizplus · Accepted Answer

The Capital Recovery Concept is the basis for not recognizing a loss in 2016. According to this concept, a company should only recognize a loss when the investment is sold for less than its original cost. In this case, the investment was not sold in 2016 and therefore no loss should be recognized. 
The Realization Concept is not directly applicable to this scenario. 
The Related Party Provisions and Tax Benefit Rule are not relevant to this scenario.

Dreamland Corporation Purchased 10,000 Shares of Sleepytime,Inc