Question

ContinentalContinental

​Bank, a nationwide banking​ company, owns many types of investments.

ContinentalContinental

paid

$850,000

for equity securities on December 5.

ContinentalContinental

owns less than

15​%

of the stock of the companies in which it invests. Two weeks later

ContinentalContinental

received a

$25,000

cash dividend. At December​ 31, these equity securities were quoted at a market price of

$857,000.

ContinentalContinental​'s

December income statement would include an

A.unrealized gain of

$32,000.

B.unrealized gain of

$7,000.

C.unrealized loss of

$32,000.

D.unrealized loss of

$7,000.

Answer 1

An unrealized gain/loss means the gain or the loss which is potential i.e. it has actually not been earned/incurred. For example, any change in the fair value of an investment would result in an unrealized gain/loss. When this investment would be sold, it will generate realized gain/loss. Any dividend which has been received on such an investment would be recorded as a realized income.

Accordingly, Continental bank would record an unrealized gain for the increase in the fair value of its investment over the cost of the investment i.e. $857,000 - $850,000 = $7,000

Hence, option B i.e. unrealized gain of $7,000 is the correct answer.