Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:
A)Allowance to Adjust Short-Term Investments to Market 9,000 Unrealized Gain on Short-Term Investments 9,000
B)Unrealized Loss on Short-Term Investments 9,000 Allowance to Adjust Short-Term Investments to Market 9,000
C)Allowance to Adjust Short-Term Investments to Market 9,000 Short-Term Investments 9,000
D)Realized Gain on Investments 9,000 Short-Term Investments 9,000

Question

Quizplus · Accepted Answer

Since the market value of the trading security is higher than its original cost, an unrealized gain has been realized. To adjust for this gain, we need to increase the market value of the investment on the balance sheet.

The adjusting entry would be:

Allowance to Adjust Short-Term Investments to Market 9,000
Unrealized Gain on Short-Term Investments 9,000

Option A is the best choice because it correctly reflects the increase in market value of the trading security and the corresponding unrealized gain. Option B and C are incorrect because they do not reflect the increase in value of the trading security. Option D is incorrect because the gain is unrealized and should not be recorded as a realized gain until the security is sold.

Stock Categorized as Trading Securities Is Purchased for $52,000