McGinn Company Purchased 10% of RJ Company's Common Stock During

question 7

Multiple Choice

McGinn Company purchased 10% of RJ Company's common stock during 20X3 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X3 and a $105,000 fair value at the end of 20X4. Which of the following statements is incorrect if McGinn classifies the investment as available-for-sale security?

• A) The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings.
• B) The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings.
• C) The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings.
• D) The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of financial position as a component of stockholders' equity.

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Definitions:

Original Purchase

The initial acquisition of an asset or item, often referring to the first time it was bought or the condition in which it was first obtained.

Stockholders' Equity

Stockholders' equity represents the residual interest in the assets of a corporation, after deducting its liabilities. It is also known as shareholders' equity.

Liabilities

Liabilities represent obligations or debts that a company owes to external parties, which must be settled through the transfer of assets or services.

Assets

Economic resources owned by a business or individual, expected to bring future benefits.