Somebody help me out here… shouldn't this be a 30,000 increase (not decrease) to the valuation allowance? Or do we always look at the valuation allowance's balance as a positive number regardless of whether it is a gain or loss being recorded? This would be so much more simple if they just simply called it “unrealized gain/loss” as opposed to “valuation allowance.”
The following information pertains to Smoke, Inc.'s investment in marketable equity securities:
-On December 31, Year 2, Smoke reclassified a security with a $70,000 cost and a $50,000 fair value from trading to available-for-sale.
-An available-for-sale marketable equity security costing $75,000, written down to $30,000 in Year 1, had a $60,000 fair value on December 31, Year 2. Smoke believes the recovery is permanent.
What is the net effect of the above items on Smoke's valuation allowance for available-for-sale marketable equity securities as of December 31, Year 2?
a. $10,000 decrease
b. No effect
c. $30,000 decrease
d. $20,000 increase
C is the correct answer, and you can get to the dollar amount pretty easily, but I'm really hung up on the fact that they call it a decrease for some reason. I equate a credit balance valuation allowance to a “loss” and would automatically think “increase” in this case.
F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016
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