Harlon accounts for its equity investment portfolio at fair value through net income. Harlon sold its holdings of A Corporation shares on June 1, 2022, for $15 million. On September 12, it purchased the C Corporation shares. Required: 1. What is the effect of the sale of the A Corporation shares and the purchase of the C Corporation shares on Harlon's 2022 pretax earnings

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03-12-2021
Business

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Harlon accounts for its equity investment portfolio at fair value through net income. Harlon sold its holdings of A Corporation shares on June 1, 2022, for $15 million. On September 12, it purchased the C Corporation shares. Required: 1. What is the effect of the sale of the A Corporation shares and the purchase of the C Corporation shares on Harlon's 2022 pretax earnings

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anthougo anthougo · Answer 1 · 2021-12-11T18:38:48+01:00

The sale of the A Corporation stock and the subsequent purchase of the C Corporation stock on Harlon's pretax earnings results in an unrealized holding gain.

The unrealized holding gain occurs because the Harlon Corporation reinvested the sale proceeds with the purchase of C Corporation stock. While the pretax earnings will increase by the gain (difference between the sale proceeds and the investment's book value), the unrealized holding gain is not taxable.

Thus, the effect of the sale increases the pretax earnings in the financial statements but the purchase of another investment cancels its taxation effect for the current moment.

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