Smith buys and sells securities. On December 15, 2018, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2018, the Jones shares had a fair value of $525,000. In the 2018 financial statements, Smith will report (ignore taxes):

Question

Quizplus · Accepted Answer

Smith elected the fair value option, which means that the investment is recorded at its fair value and any changes are recognized in income. Therefore, Smith will report investment income of $25,000 in its income statement for the period. Option B is incorrect because the fair value adjustment is recognized in income, not other comprehensive income. Option C is incorrect because accumulated other comprehensive income is used to record unrealized gains or losses on certain types of investments held for a longer period of time. Option D is incorrect because the investment should be recorded at its fair value, which is $525,000, not its original cost of $500,000.

Smith Buys and Sells Securities