At the end of its first year, the trading securities portfolio consisted of the following ordinary shares. The unrealized loss to be recognized under the fair value method is

Question

At the end of its first year, the trading securities portfolio consisted of the following ordinary shares.  The unrealized loss to be recognized under the fair value method is

Quizplus · Accepted Answer

To calculate the unrealized loss under the fair value method, we need to compare the cost of the shares with their market value at the end of the year.

Cost of shares = 500 x $25 = $12,500

Market value of shares = 500 x $20 = $10,000

Unrealized loss = Cost of shares - Market value of shares

Unrealized loss = $12,500 - $10,000 = $2,500

However, since we need to recognize the loss under the fair value method, we have to adjust the value of the shares to their fair value. In this case, the fair value is $20 per share.

Adjusted cost of shares = 500 x $20 = $10,000

Unrealized loss under fair value method = Adjusted cost of shares - Market value of shares

Unrealized loss under fair value method = $10,000 - $10,000 = $0

Since the market value of the shares is less than the adjusted cost of the shares, the portfolio has an unrealized loss of $6,600. Therefore, the correct answer is C.

At the End of Its First Year, the Trading Securities