Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. Which of the following statements is correct if Rye classiﬁes the investment as an available-for-sale security and sold it at the beginning of 20X4 for $148,000?

Question

Quizplus · Accepted Answer

CFor available-for-sale securities, unrealized gains and losses are reported in other comprehensive income, not in the statement of earnings. Therefore, the $8,000 increase in fair value at the end of 20X2 ($160,000 fair value - $150,000 cost) is an unrealized gain reported in other comprehensive income, not on the statement of earnings, making option C correct. When the security is sold in 20X4 for $148,000, the realized gain or loss is calculated based on the original cost. Since the security was purchased for $150,000 and sold for $148,000, Rye Company realizes a $2,000 loss, making option A correct.

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