If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to recognize the loss
A) is not required since the share prices will likely rebound in the long run.
B) will show a debit to an expense account.
C) will show a credit to a valuation allowance account that appears in the stockholders' equity section of the balance sheet.
D) will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.

Question

Quizplus · Accepted Answer

The entry to recognize the loss on an available-for-sale security is a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet. Therefore, choice D is the correct answer. Choice A is incorrect because assuming the stock price will rebound in the long run is not a valid accounting principle. Choice B is incorrect because expenses are not used to recognize losses on investments. Choice C is incorrect because a valuation allowance account is used for write-downs of other assets, not available-for-sale securities.

If the Cost of an Available-For-Sale Security Exceeds Its Fair