McGinn Company purchased 10% of RJ Company's common stock during 2016 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2016 and a $105,000 fair value at the end of 2017. Which of the following statements is incorrect if McGinn classifies the investment as an available-for-sale security?
A)The 2016 unrealized loss is $10,000, but is not included in McGinn's 2016 net income.
B)The 2017 unrealized gain is $15,000, but is not included in McGinn's 2017 net income.
C)The 2017 unrealized gain is $10,000 and is included in McGinn's 2017 net income.
D)The 2016 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity.

Question

Quizplus · Accepted Answer

If an investment is classified as available-for-sale, unrealized gains and losses are reported as a component of other comprehensive income and are not immediately recognized in net income. Therefore, statement C is incorrect as it suggests that the unrealized gain is included in McGinn's 2017 net income. The 2016 unrealized loss of $10,000 is reported as a component of other comprehensive income on McGinn's balance sheet, as per statement D. Statements A and B are correct in terms of the treatment of unrealized gains and losses for available-for-sale securities.

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