Question

On October 18, 2020, Hammons Restaurants purchased 8,000 shares of Bronson Food Distributors for $30 per share. On December 6, Hammons sold 2,000 shares of Bronson’s stock for $35 per share. On December 31, 2020, the market price of Bronson’s stock was $28 per share. On their December 31, 2020 income statement, Hammons Restaurants should report a total gain/loss of __________ related to their Bronson investment.

Answer 1

Answer:

They will have a loss of $2000

Explanation:

The reason is that the short term investments are always valued at market value and the market value of 6000 shares that are left unsold are valued at $28 per share which is $2 lower than the $30 price paid to purchase 8000 shares.

The 2000 shares out of 8000 shares were sold at $35 which means the total gain on sale = ($35-$30) * 2000 shares = $10,000

On the other hand the market value of the 6000 shares left unsold is $28.

This means the net loss on decrease in value of the shares left unsold at the end of the year = ($30 - $28) * 6000 shares = $12,000

The net gain / (loss) = Gain on sale - Loss on decrease in Market value

The net gain / (loss) = $10,000 - $12,000 = ($2,000)