Question

On July 31, Beatrice Co. purchased 2,000 shares of SimmTech stock for $16,000. This investment is considered to be an available-for-sale investment. On October 31, which is Beatrice's year-end, the stock had a market value of $20,000. Beatrice should record a:

Answer 1

Answer: a. Credit to Unrealized Gain-Equity for $4,000.

Explanation:

Because the investment is an AVAILABLE FOR SALE investment, gains and losses made on it are recorded under COMPREHENSIVE INCOME in the Equity section as Unrealized gains or losses.

Because this is profit, it is treated as Unrealized gains and is Credited in the Equity section under Comprehensive income.

You however only record the gains or losses and not the whole amount because the investment is recorded at Fair Value as an asset.

Therefore in this scenario, the gain is $20,000-$16000 which is $4000. That is what is recorded as an Unrealized gain.