Bob purchases 25,000 shares of common stock of Super Duper for $100,000. Exactly one year later when the stock is selling for $5 per share, Bob sells 5,000 shares for $25,000 and holds on to the remaining 20,000 shares. Which of the following statements is correct? Group of answer choicesBob has a realized capital gain of $4,000 and an unrealized capital gain of $1,000.Bob has a realized capital gain of $5,000 and an unrealized capital gain of $20,000.Bob has a $25,000 realized capital gain.Bob has a $5,000 unrealized capital gain.

Question
Asked Nov 3, 2019

Bob purchases 25,000 shares of common stock of Super Duper for $100,000. Exactly one year later when the stock is selling for $5 per share, Bob sells 5,000 shares for $25,000 and holds on to the remaining 20,000 shares. Which of the following statements is correct? 

Group of answer choices
Bob has a realized capital gain of $4,000 and an unrealized capital gain of $1,000.
Bob has a realized capital gain of $5,000 and an unrealized capital gain of $20,000.
Bob has a $25,000 realized capital gain.
Bob has a $5,000 unrealized capital gain.
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Expert Answer

Step 1

An investor can gain on assets when the current price of the asset exceeds the purchase price. This gain can say to be an unrealized gain until the investor sells the asset for cash and make immediate profit.

The gain which an investor experience after selling a stock at higher price than the purchase price is known as realized capital gain.

Step 2

The investor purchased 25,000 common stocks for $100,000. This means the purchase price of each common stock would be ($100,000 ÷ 25,000) = $4. The selling price per share is $5. Thus, the investor makes a capital gain of $1 on selling of each share.

The investor sells 5,000 units of stock. The realized capital gain on the sale of share will be ($1 × 5,000) = $5,000.

Step 3

Investor can still make more profit of ($1 × 20,000) = $20,000 by selling the additional 20,000 units of stock. The time until the investor sells th...

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