Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 2014 for
$148,000?

Question

Quizplus · Accepted Answer

Since Rye classified the investment as a trading security, the fair value changes are recorded in the statement of earnings.

In 2012, the investment had a fair value of $160,000, which exceeds the cost of $150,000. Therefore, Rye reports an unrealized gain of $10,000 ($160,000 - $150,000) on the statement of earnings for 2012.

In 2013, the investment had a fair value of $140,000, which had decreased from the prior year. Therefore, Rye reports an unrealized loss of $20,000 ($140,000 - $160,000) on the statement of earnings for 2013.

When Rye sells the investment at the beginning of 2014 for $148,000, it will realize a gain or loss based on the difference between the sale price and the cost of the investment. Since the cost was $150,000 and the sale price was $148,000, Rye will report a realized loss of $2,000 ($148,000 - $150,000) on the statement of earnings for 2014.

Therefore, the correct statement is: The 2014 realized gain reported on the statement of earnings is $8,000.

Rye Company Purchased 15% of Lena Company's Common Stock During