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 correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 2018 for $102,000?

Question

Quizplus · Accepted Answer

Since the investment was classified as an available-for-sale security, any changes in fair value were recognized as unrealized gains or losses in other comprehensive income. Therefore, the unrealized gain of $15,000 ($105,000 - $90,000) would have been recognized in other comprehensive income in 2017. When the investment was sold in 2018, McGinn would recognize a realized gain of $2,000 ($102,000 - $100,000) on the income statement. The unrealized gain of $15,000 would not be reclassified to the income statement since the investment was sold.

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