McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. Which of the following statements is correct if McGinn classifies the investment as a trading security?
A) The 2014 unrealized loss is $10,000, but is not included in McGinn's 2014 net income.
B) The 2015 unrealized gain is $15,000, but is not included in McGinn's 2015 net income.
C)The 2015 unrealized gain is $15,000 and is included in McGinn's 2015 net income.
D)The 2014 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity and is not reported on the income statement.

Question

Quizplus · Accepted Answer

If McGinn classifies the investment as a trading security, any unrealized gains or losses are recognized in net income in the period they occur. Therefore, the 2015 unrealized gain of $15,000 would be included in McGinn's 2015 net income. The 2014 unrealized loss of $10,000 would not be included in McGinn's 2014 net income, as it is not realized until the investment is sold or the fair value changes again in the future. Therefore, choices A, B, and D are incorrect.

McGinn Company Purchased 10% of RJ Company's Common Stock During