Intermediate Accounting
Burr Corporation began operations on January 1, 2007, and at December 31, 2007, Burr had the following investment portfolio of marketable equity securities:
In current assets In noncurrent assets
Aggregate cost $185,000 $275,000
Aggregate market value 150,000 225,000
Net unrealized loss $ 35,000 $ 50,000
All the declines are judged to be temporary. Valuation allowances at December 31, 2007 should be established with corresponding charges against:
Income Stockholders’ equity
a. $ -0- $85,000
b. 35,000 50,000
c. 50,000 35,000
d. 85,000 -0-
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Answers
Answer: b. $35,000 against income and $50,000 against stockholders' equity. The valuation allowances should be established to recognize and account for the unrealized losses in the portfolio of marketable equity securities. The aggregate net unrealized loss is $35,000, so $35,000 should be charged against income (an expense). The remaining unrealized loss of $50,000 should be charged to stockholders' equity, as it represents a deduction from the asset value.
