A company purchased a marketable security for $10,000 on 3/3/2013. On 3/30/2013, the company prepared its financial statements and marked the security to its market value, which was $17,500. The security was sold on 4/30/2013 for $15,000. The company used the Available-for-Sale method to account for the security. The statutory tax rate is 35%.
The method used to account for the security on the books is irrelevant because the realized gain based on the purchase price is used for tax purposes regardless of the book accounting method. The company recorded a realized gain for tax purposes of $5,000 ($15,000 sales price – $10,000 purchase price). Income Tax Payable will increase by the tax on the gain: $5,000 x .35 = $1,750.
