Question

During 2012, Walker Corporation acquired 500 shares of Wychek stock at $30 per share. Walker Corporation accounted for the stock as available-for-sale securities. All declines in market value are considered to be temporary. The market price per share of Wychek’s stock as of December 31, 2012 and 2013, is $22.50 and $37.50, respectively. Given this information, the correct adjusting entry by walker at December 31, 2013, would include a credit to
A.Market Adjustment – Available-for-Sale Securities of $3,750
B.Unrealized Increase in Value of Available-for-Sale Securities – Equity of $7,500
C.Market Adjustment – Available-for-Sale Securities of $7,500
D.Unrealized Increase in Value of Available-for-Sale Securities – Equity of $3,750

Answer 1

Answer: B.Unrealized Increase in Value of Available-for-Sale Securities Equity of $7,500

Explanation:

Walker acquired the 500 shares at a price of $30 in 2012. At the end of 2012 however, the shares were worth $22.50.

At the end of 2013, it is stated that the shares are now worth $37.50 meaning they increased in value.

The value of the increase is therefore the difference between the most recent previous price and the new price,

= 500 shares * ( 37.50 - 22.50)

= $7,500

Available for Sale Securities Account should therefore see an increase of $7,500 because of the increase in price from the end of 2012 to the end of 2013.

It is worthy of note that at the end of 2012, the account decreased by the difference between the purchase price of $30 and the end of 2012 price of $22.50. This is why at the end of 2013, the price used as the previous price was $22.50.