Orlov Corporation purchased 22,000 shares of Matsey Corporation common stock for $40 per share on January 1,2012.Matsey reported net income of $120,000 for 2012 and paid dividends of $45,000 during 2012.As of December 31,2012,the market value of Matsey Corporation common stock was $39 per share.Assuming the shares owned by Orlov represent 10 percent of the total outstanding stock of Matsey,the year end adjustment entry in Orlov Corporation's books is:

Question

Quizplus · Accepted Answer

Since the market value of Matsey Corporation common stock at the end of 2012 is less than what Orlov Corporation paid for it, there is an unrealized loss on Orlov's long-term investment. According to the cost principle of accounting, long-term investments are initially recorded at cost, but if their market value declines below cost, an allowance account is used to adjust the investments to market value. Therefore, the correct year end adjustment entry would be to record the unrealized loss on long-term investments and create an allowance to adjust the investment to its market value. Option A is incorrect because it only reflects the dividends received but not the change in value, while option B is incorrect because it only reflects the cost of purchasing the shares and does not adjust for the change in market value. Option D is incorrect because it reflects a loss but does not adjust the long-term investment to market value.

Orlov Corporation Purchased 22,000 Shares of Matsey Corporation Common Stock