Question

Hawk Corporation purchased 10,000 Diamond Corporation bonds in 2015 for $50 per bond and classified the...

Hawk Corporation purchased 10,000 Diamond Corporation bonds in 2015 for $50 per bond and classified the investment as securities available for sale. The value of the Diamond investment was $89 per bond on December 31, 2016, and $96 on December 31, 2017. During 2018, Hawk sold all of its Diamond investment at $149 per bond.

In its 2018 income statement, Hawk would report:

Multiple Choice

  • A loss of $460,000.

  • A gain of $990,000.

  • A gain of $1,450,000.

  • A gain of $530,000.

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Answer #1

Answer :-

The Correct Answer is Option - A Gain of $9990,000

Explanation :-

First we find the Unrealized Gain of Hawk corporation -

Unrealized Gain of Hawk corporation = ( Value of Diamond investment on December 31, 2017 - Purchase price of bonds ) × No. of share purchase

Value of Diamond investment on December 31,2017 = $96

Purchase price of bonds = $50

No. of shares purchase = 10,000 shares

Unrealized Gain of Hawk corporation = ($96 - $50 ) × 10,000 shares

Unrealized Gain of Hawk corporation = $460,000.

Additional Gain on sale of Diamond investment = ( Investment sold value - Value of Diamond investment on December 31, 2018) × No. of share.

Additional Gain on sale of all Diamond investment = ( $149 - $96 ) × 10,000 share

Additional Gain on sale of all Diamond investment = $530,000

Hawk Total gain in its 2018 income statement = Unrealized Gain of Hawk corporation + Additional Gain on sale of all Diamond investment

Hawk Total gain in its 2018 income statement = $460,000 + $530,000

Hawk Total gain in its 2018 income statement= $990,000.

Answer - A gain of $990,000.

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