Question

During the current year, the North Company purchased 200 shares of the South Company stock for $12,000 as a temporary investment. At the end of the year, the market value of the stock was $10,000.The North Company's financial statements for the current year should show

(A) a loss of $2,000 on the income statement and temporary investments of $12,000 on the balance sheet
(B) no loss on the income statement and temporary investments of $12,000 on the balance sheet
(C) a gain of $2,000 on the income statement and temporary investments of $10,000 on the balance sheet
(D) a loss of $2,000 on the income statement and temporary investments of $10,000 on the balance sheet
(E) no loss on the income statement and temporary investments of $10,000 on the balance sheet

Answer 1

The North Company's financial statements for the current year should show a loss of $2,000 on the income statement and temporary investments of $10,000 on the balance sheet.

Step-by-step explanation:

The North Company's financial statements for the current year should show option D) a loss of $2,000 on the income statement and temporary investments of $10,000 on the balance sheet.

When the market value of the stock is lower than its cost, a loss on the investment is recognized. In this case, the North Company purchased 200 shares for $12,000 but the market value at the end of the year was only $10,000, resulting in a loss of $2,000. This loss would be reported on the income statement, while the temporary investment of $10,000 would be reported on the balance sheet.