Question

On December 31, 2020 (fiscal year-end) Chair, Inc.'s Trading Security Portfolio has a market value of $110,000. All Securities in the portfolio were purchased during 2020, and had a total cost of S105,000. What effect would the change in market value (fair value) have on Chair, Inc.'s financial statements for the year ending December 31, 2020. If there is no effect, simply answer "no effect". Type your answers in the respective text boxes Income Statement: Balance Sheet: Assume that all facts regarding Chair, Inc.'s investment portfolio are the same as stated above, with the exception that the investments lead been classified as Available for sale. Identify how the change in market value affected Chair, Inc.'s financial statements for the year ending December 31, 2020. If there is no effect, simply answer" no effect". Type your answers in the respective text boxes: Income Statement: Balance Sheet:

Answer 1

The change in market value of Chair, Inc.'s Trading Security Portfolio would have no effect on the Income Statement. However, it would have an effect on the Balance Sheet, depending on the classification of the investments.

Step-by-step explanation:

The change in market value of Chair, Inc.'s Trading Security Portfolio at the end of the year would have no effect on the Income Statement. This is because the change in market value of trading securities is not recognized as revenue or expenses on the Income Statement. Therefore, the change in market value would have no effect on the Income Statement.

On the Balance Sheet, the change in market value would affect the Investments section. The market value of the trading securities would be reported at $110,000 as of the year-end, which would be higher than the total cost of $105,000. Therefore, there would be an increase in the Investments section on the Balance Sheet, specifically under the Trading Security Portfolio account.

If the investments were classified as Available for Sale instead of trading securities, the change in market value would also have no effect on the Income Statement. However, on the Balance Sheet, the change in market value would be reported as an unrealized gain or loss in the Other Comprehensive Income section. This would not impact the net income but would affect the shareholders' equity.