ACCA Applied Skills · Financial Reporting · Financial instruments
Nova buys 20,000 shares in a listed company for $4 each, held for trading, and pays $2,000 broker commission. At the year end the shares are quoted at $4.50. What is the total effect on profit before tax for the year?
Profit before tax increases by $8,000. The shares are measured at fair value through profit or loss, giving a $10,000 gain from $80,000 to $90,000, while the $2,000 transaction costs are expensed immediately rather than added to cost.
- A$8,000 profitCorrect
- B$10,000 profit
- C$12,000 profit
- D$2,000 profit
Explanation
Shares held for trading are FVPL. Transaction costs are expensed immediately: $2,000 expense. Initial fair value $80,000; year-end value 20,000 x 4.50 = $90,000; gain $10,000. Net effect = 10,000 - 2,000 = $8,000 profit. Option $10,000 ignores the commission.
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