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-
To determine which option is correct, we need to understand the accounting treatment for unrealized losses on marketable equity securities.
Unrealized losses on marketable securities are typically considered temporary declines in value that result from market fluctuations. These losses are not realized until the securities are actually sold. As per the information given, all the declines in the investment portfolio are judged to be temporary.
The valuation allowances for unrealized losses on marketable equity securities are established to reflect the decline in value between the aggregate cost and the aggregate market value of the securities.
In this case, the net unrealized loss for the current assets portfolio is $35,000, and for the noncurrent assets portfolio it is $50,000.
So, the total net unrealized loss for both portfolios is $35,000 + $50,000 = $85,000.
Since the declines are temporary, the valuation allowances should be established as a charge against stockholders’ equity.
Therefore, the correct answer is:
Income: $0
Stockholders’ equity: $85,000
Option (a) corresponds to this answer, where there is no charge against income and a charge of $85,000 against stockholders' equity.