ExpertEasy1 markMultiple Choice
CPA · Question 27 · Area II: Balance Sheet Accounts
Blue Corp. holds equity securities with a cost of $10,000 and a fair value of $12,000 at the end of Year 1. In Year 2, the fair value drops to $9,000. Blue does not have significant influence. What is the impact on Net Income in Year 2?
Blue Corp. holds equity securities with a cost of $10,000 and a fair value of $12,000 at the end of Year 1. In Year 2, the fair value drops to $9,000. Blue does not have significant influence. What is the impact on Net Income in Year 2?
Answer options:
A.
$1,000 loss
B.
$0
C.
$3,000 loss
D.
$2,000 gain
How to approach this question
Equity securities (no influence) are carried at Fair Value through Net Income (FVTNI). The gain/loss is the change in fair value during the period.
Full Answer
C.$3,000 loss✓ Correct
C
Equity securities are measured at fair value with changes reported in Net Income. <br/>Balance at end of Year 1: $12,000.<br/>Balance at end of Year 2: $9,000.<br/>Change: $3,000 decrease. <br/>This is reported as a $3,000 unrealized loss in Year 2 Net Income.
Common mistakes
Calculating cumulative gain/loss from cost ($1,000 loss). Thinking it goes to OCI (that's for Debt Securities AFS).
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