Rye Company purchased 15% of Lena Company's common stock during 2014 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2014 and a $140,000 fair value at the end of 2015. 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 2016 for $148,000?

Question

Quizplus · Accepted Answer

When Rye purchased the 15% of Lena's common stock, it classified it as an available-for-sale security. The fair value of the investment was $160,000 at the end of 2014 and $140,000 at the end of 2015. As of the end of 2015, Rye would need to recognize an unrealized loss of $20,000 ($160,000 - $140,000) in its comprehensive income.

If Rye sold the investment at the beginning of 2016 for $148,000, this would result in a realized loss. The realized loss would be calculated as the sale price of $148,000 minus the carrying value of the investment of $150,000, or a loss of $2,000. Therefore, option A is correct.

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