CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Culpepper Corporation owns available-for-sale securities with a cost of $90,000. Immediately before the year-end adjustment, the market adjustment account has a $5,000 debit balance. The securities have a current value of $85,000 at the end of 2011. Which one of the following is the correct adjustment to the market adjustment account?

A. $5,000 credit
B. $10,000 credit
C. $5,000 debit
Correct Answer: B

Since market value of $85,000 is less than the cost of $90,000, a $5,000 credit balance is the correct ending balance of the market adjustment account. A $10,000 credit is required to bring the market adjustment account from a $5,000 debit to a $5,000 credit.

User Contributed Comments 10

User Comment
kalps Surely the double entry for market adjustment would be to credit AFS securities US$5000 ( to reduce its value) and debit the market adjustment account US$5000
Gina Beginning:
securities allow. f/adjustm
---------- ----------------
90K | | 5K

Step 1:
securities allow f/adjustm
---------- ----------------
90K | | 5K
| 5K

Final:
securities
-----------
85K |
Gina ignore whatever I was trying to do before.
CARRYOVER
securities debit 90K
market adjustment acct debit 5K

YEAR-END ADJUSTMENT
market adjustment acct credit 10K
bobert The market adjustment account is a contra asset account. That should also help you when trying to figure out the debit ans credit situation.
SaeedAlam Contra asset. That clears evthn up. Thanks Bobert
poomie83 I think the entry would be
DEbit unrealised loses 10k
Credit market adj acc 10k

Could someone please clarify
msoussan I need help please. i do not get it.
Thank you in advance
Ifi2703 A contra asset ccount can never have a debit balance - it can only have a credit or zero balance. Therefore as the account previously had a 'debit' of $5000, we credit back the $5000 'debit' and also credit the account with an additional $5000 which we have lost in terms of the fair value of the securities. Thus in total we would credit the account with $10,000.
microeconomist Thank you for explaining that Ifi2703. Pay no attn to my shorthand for next year's review.

[~realized/\loss A-S] c) [credit/\to contra acct] .:creditVzero acct balance
Paul7059 that's a good one - which LOS would that be?
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