Question

Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at

Answer 1

Dyckman Dealers should carry the trading security investment in Thomas Corporation at its fair market value of $20,000, as dictated by accounting standards.

Step-by-step explanation:

The investment in Thomas Corporation by Dyckman Dealers, which is accounted for as a trading security, should be recorded on the balance sheet at its fair market value.

In this case, the fair market value is given by the current trading price on the New York Stock Exchange, which is $20,000.

Management's belief that the market is overvalued and their internal valuation of $18,000 is irrelevant for accounting purposes since Generally Accepted Accounting Principles (GAAP) dictate that trading securities must be carried at fair value on the balance sheet.