Dreamland Corporation purchased 10,000 shares of Sleepytime, Inc. common stock for $200,000 on February 19, 2017. On December 31, 2017, the value of the Sleepytime stock declines to $180,000. Dreamland sells the Sleepytime stock for $170,000 on January 10, 2018. Dreamland does not recognize a loss on the stock in 2017, but does recognize a loss of $30,000 in 2018. 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, 2017. On December 31, 2017, the value of the Sleepytime stock declines to $180,000. Dreamland sells the Sleepytime stock for $170,000 on January 10, 2018. Dreamland does not recognize a loss on the stock in 2017, but does recognize a loss of $30,000 in 2018. 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 on the Sleepytime stock in 2017, as the decline in value was not deemed to be permanent until the sale in 2018. The Realization Concept is the basis for recognizing the loss in 2018 when the stock was sold. The Related Party Provisions and Tax Benefit Rule are not relevant to this scenario. Therefore, statements I and III are correct.

Dreamland Corporation Purchased 10,000 Shares of Sleepytime, Inc