Question

At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. Total fair value is $250,000. The financial statements should show

A. an addition to an asset of $5,000 and a realized gain of $5,000.
B. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders

Answer 1

B. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders

Step-by-step explanation:

There is a cost of $245,000 and the value that can be received today in case the trading securities are sold = $250,000

Thus, there can be gain in case if it is sold of $5,000.

Since it is not sold right now, and is current in nature because it is valued at fair price and not at historical cost, the gain is unrealized in nature.

Thus, this increase in value would increase the value of assets in the books, and that the gain shall be recorded as other income as unrealized gains from securities.