Part 1PM Distributors began Year 2 with Equity Investments of $ 8,300$8,300 (which consisted of a single investment) as well as a debit balance of $ 800$800 in the Fair Value Adjustment minus− Equity Investments account. PM does not have significant influence over the investee, and the investment has a readily determinable fair value. This trading security was sold for $ 9,100$9,100 during Year 2. How much was the gain or loss for the sale of this investments and how is it recorded? Part 1
A. Realized Loss of $ 800$800, reported as part of Net Income B. Unrealized Gain of $ 800$800, reported as part of Other Comprehensive Income C. Realized Gain of $ 800$800, reported as part of Net Income D. No gain or loss reported, as the investment was sold for the adjusted fair value

Question

Part 1PM Distributors began Year 2 with Equity Investments of $ 8,300$8,300 ​(which consisted of a single​ investment) as well as a debit balance of $ 800$800 in the Fair Value Adjustment minus− Equity Investments account. PM does not have significant influence over the​ investee, and the investment has a readily determinable fair value. This trading security was sold for $ 9,100$9,100 during Year 2. How much was the gain or loss for the sale of this investments and how is it​ recorded? Part 1
A. Realized Loss of $ 800$800​, reported as part of Net Income B. Unrealized Gain of $ 800$800​, reported as part of Other Comprehensive Income C. Realized Gain of $ 800$800​, reported as part of Net Income D. No gain or loss​ reported, as the investment was sold for the adjusted fair value

BlackTom AI · Accepted Answer

The question presents a scenario with Year 2 trading securities: PM began with Equity Investments of 8,300 and a debit balance of 800 in the Fair Value Adjustment – Equity Investments account. The investment had readily determinable fair value and PM does not have significant influence. It is a trading security, and it was sold for 9,100 during Year 2. We are asked to determine the gain or loss on the sale and how it should be recorded.

Option A: Realized Loss of 800, reported as part of Net Income. This would be correct if the carrying amount of the investment at the time of sale exceeded the sale price by 800, creating a realized loss that flows through net income. However, the given information indicates the carrying amount needs to be inferred from the values provided, and the sale price equals the carrying amount in this setup, so there is no loss.

Option B: Unrealized Gain of 800, reported as part of Other Comprehensive Income. Unrealized gains or losses on trading securities do not flow through other comprehensive income; trading securities are measured with changes in fair value through net income, not OCI. Additionally, since the security was sold, any post-sale unrealized amount would no longer exist as an ongoing unrealized OCI item.

Option C: Realized Gain of 800, reported as part of Net Income. A realized gain would occur if the sale price exceeded the carrying amount at the time of sale. To determine the carrying amount, we combine the initial investment (8,300) with the fair value adjustment (debit balance of 800). A debit balance in the Fair Value Adjustment typically increases the asset’s carrying amount, so carrying amount = 8,300 + 800 = 9,100. Since the sale price is also 9,100, there is no difference between sale proceeds and carrying amount, hence no realized gain.

Option D: No gain or loss reported, as the investment was sold for the adjusted fair value. This matches the calculation above: the carrying amount after the fair value adjustment is 9,100, and the asset is sold for 9,100, resulting in zero gain or loss on the sale. Therefore, no gain or loss is reported on the income statement for the sale itself.

In summary, the fair value adjustment increases the recorded carrying amount to 9,100, which exactly matches the sale proceeds of 9,100, yielding a zero gain or loss on disposal. The correct accounting treatment is to recognize no gain or loss from the sale (Option D), with the sale price equaling the adjusted carrying amount. The other options misinterpret how trading securities and fair value adjustments interact in determining realized gains/losses and the proper presentation (net income vs OCI).

Test:Midterm 2 Problems

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