Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current fair value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?
A) The investment in available-for-sale securities would be reported on the balance sheet at its $100,000 cost.
B) The $5,000 unrealized gain is reported within the income statement.
C)The $5,000 realized gain is reported within the income statement.
D)The investment in available-for-sale securities would be reported in the balance sheet at its $105,000 fair value and an unrealized holding gain on available-for-sale securities would be reported in the stockholders' equity section of the balance sheet.

Question

Quizplus · Accepted Answer

According to the available-for-sale securities accounting treatment, the securities are reported at fair value on the balance sheet. Therefore, the investment in available-for-sale securities would be reported in the balance sheet at its $105,000 fair value. Since the securities are classified as available-for-sale, any unrealized holding gains or losses are reported in the stockholders' equity section of the balance sheet as a separate component of accumulated other comprehensive income. Therefore, an unrealized holding gain on available-for-sale securities of $5,000 would be reported in the stockholders' equity section of the balance sheet. No gains or losses are recognized in the income statement until the securities are sold, at which point any realized gains or losses would be reported.

Libby Company Purchased Equity Securities for $100,000 and Classified Them