Final answer:
Trump Company should report an unrealized gain of $25,000 on its 2018 income statement due to the increase in fair value of its investment in equity securities from $560,000 to $585,000.The correct answer is option 3 .
Step-by-step explanation:
The question pertains to how Trump Company should report the change in fair value of its investment in equity securities on its income statement for the year ended December 31, 2018. Originally, the investment had a cost of $600,000 and was reported on the balance sheet at a fair value of $560,000 as of December 31, 2017. By the end of 2018, the fair value had increased to $585,000, reflecting an improvement in the market value.
According to accounting principles, changes in fair value for such investments are typically reported as unrealized gains or losses on the income statement if the securities are classified as available-for-sale or marked as fair value through profit or loss (this depends on the specific accounting standards being followed, such as GAAP or IFRS). Since the question does not specify these details but does ask about the income statement impact, we can deduce that they are referring to a scenario where such gains and losses would be recorded in current earnings. Thus, the increase of $25,000 in the value of the investment (from $560,000 to $585,000) of the equity securities is considered an unrealized gain because the securities have not been sold yet. The company would report an unrealized gain of $25,000 on its 2018 income statement.
The correct option to report on the income statement as a result of the increase in fair value of the investments in 2018 is option 3) Unrealized gain of $25,000.