On March 15,Alan Company purchased 10% of Cameo Corp.'s stock for $35,000.This is the company's first and only stock investment.On Alan's June 30 year-end,the stock had a fair value of $34,000.Alan should do which of the following:
A)Record a debit to the Fair Value Adjustment-Stock account.
B)Record a debit to the Unrealized Loss-Income account.
C)Report a decrease in the Gain on Sale of Investment income statement account.
D)Report an increase in the asset section of the balance sheet.
E)Record a credit to the Unrealized Gain-Income account.

Question

Quizplus · Accepted Answer

When an investment is classified as available-for-sale, unrealized gains and losses are recognized in other comprehensive income (OCI) until the investment is sold. In this case, since the fair value of the investment at June 30 is less than its cost, Alan would record a debit to the Unrealized Loss-Income account. There is no need to adjust the fair value of the stock investment account, as the fair value adjustment is already reflected in the investment's carrying value. Additionally, there has been no sale of the investment, so there is no gain or loss to recognize in the income statement. The asset section of the balance sheet would not increase, as the investment's carrying value remains at its cost of $35,000. A credit to the Unrealized Gain-Income account would be appropriate only if the fair value of the investment had increased above its cost.

On March 15,Alan Company Purchased 10% of Cameo Corp