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.

Question

Quizplus · Accepted Answer

The correct answer is C because for available-for-sale securities, unrealized gains or losses are recognized in other comprehensive income, not in net earnings. Thus, the statement that the unrealized gain is included in net earnings is incorrect.

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