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 first need to compare the cost of the securities with their fair value at the end of the year.

The cost of the securities is:
500 x $22 = $11,000
400 x $30 = $12,000
300 x $45 = $13,500

The fair value of the securities is:
500 x $20 = $10,000
400 x $25 = $10,000
300 x $30 = $9,000

Therefore, the total unrealized loss is:
($11,000 - $10,000) + ($12,000 - $10,000) + ($13,500 - $9,000) = $6,500

However, the question asks for the unrealized loss to be recognized, which is different from the total unrealized loss. The recognized loss is limited to the lesser of the total unrealized loss and the amount of the credit balance in the fair value adjustment account. In this case, the fair value adjustment account has a credit balance of $100, so the maximum recognized loss is $100. Therefore, the answer is $6,600 (total unrealized loss of $6,500 limited to recognized loss of $100).

At the End of Its First Year, the Trading Securities