Accounting for Marketable Securities
Wharton, Inc. pays income taxes on capital gains at a rate of 30 percent. At December 31, 2015, the company owns marketable securities that cost $180,000 but have a current market value of $520,000.
a. How will users of Wharton’s financial statements be made aware of this substantial increase in the market value of the company’s investments?
b. As of December 31, 2015, what income taxes has Wharton paid on the increase in value of these investments? Explain.
c. Prepare a journal entry at January 4, 2016, to record the cash sale of these investments at $520,000.
d. What effect will the sale recorded in part c have on Wharton’s tax obligation for 2016?
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