McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 2016 for $102,000?
A) The 2016 realized loss reported on the income statement is $3,000.
B) The 2016 realized gain reported on the income statement is $2,000.
C)The 2016 unrealized gain reported on the income statement is $2,000.
D)The 2016 unrealized loss reported on the income statement is $3,000.

Question

Quizplus · Accepted Answer

Since the investment was classified as an available-for-sale security, changes in fair value are recognized in other comprehensive income (OCI) until the security is sold. Therefore, the $15,000 increase in fair value from 2014 to 2015 would be recognized in OCI. The realized gain or loss would be calculated as the difference between the sale price ($102,000) and the carrying value of the investment ($90,000), which is $12,000. Since the sale price exceeded the carrying value, the realized gain would be $12,000. The unrealized gain of $15,000 recognized in OCI in 2015 would be reclassified to net income upon the sale of the investment, but there would be no impact on the income statement for the unrealized loss/gain in 2016 since the investment was sold.

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