Asked by Emily Ratliff on Jun 11, 2024
Verified
In recognizing a decline in the fair value of short-term stock investments an unrealized loss account is debited because
A) management intends to realize this loss in the near future.
B) the securities have not been sold.
C) the stock market is volatile.
D) management cannot determine the exact amount of the loss in value.
Unrealized Loss Account
An account that reflects losses which have occurred on paper due to changes in market values but have not been actually realized through a transaction.
Short-Term Stock Investments
Investments in stock intended to be held for a short duration, typically less than one year, for earning a quick profit.
Fair Value
The estimated market value of an asset or liability, based on current prices in an active market.
- Discern the necessity and illustration of unrealized gains or losses on investments and their implications for financial statements.
Verified Answer
GS
Genesis SánchezJun 14, 2024
Final Answer :
B
Explanation :
The unrealized loss account is debited to recognize a decline in the fair value of short-term stock investments that have not been sold. Management may choose to wait and hold onto the securities in hopes of a rebound in value or sell them at a loss. The reason for debiting the account is to accurately reflect the decrease in value on the financial statements. The other options are not relevant to the accounting treatment of unrealized losses.
Learning Objectives
- Discern the necessity and illustration of unrealized gains or losses on investments and their implications for financial statements.