On July 31,Potter Co.purchased GigaTech bonds for $16,000.The investment is classified as available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On October 31,which is Potter's year-end,the bonds had a fair value of $20,000.Potter should record a:
A)Credit to Unrealized Gain-Equity for $4,000.
B)Credit to Market Adjustment−Available-for-Sale for $4,000.
C)Credit to Unrealized Gain-Income for $4,000.
D)Debit to Unrealized Loss-Equity for $4,000.
E)Debit to Unrealized Gain-Equity for $4,000.

Question

Quizplus · Accepted Answer

BFor available-for-sale securities, unrealized gains or losses are reported in other comprehensive income, not in the income statement. Therefore, a credit to Unrealized Gain-Equity for $4,000 (A) correctly reflects the increase in fair value in equity. Additionally, the adjustment to reflect the fair value of the securities on the balance sheet is made through a credit to Market Adjustment−Available-for-Sale for $4,000 (B), which adjusts the carrying amount of the investment to its fair value.