On August 31,2014,Steinway Company purchased the following available-for-sale securities: On December 31,2014,Steinway reclassified its investment in security I from available-for-sale securities to trading securities.What total amount of loss on these securities should be included in Steinway' income statement for the year ended December 31,2014?

Question

On August 31,2014,Steinway Company purchased the following available-for-sale securities:  On December 31,2014,Steinway reclassified its investment in security I from available-for-sale securities to trading securities.What total amount of loss on these securities should be included in Steinway' income statement for the year ended December 31,2014?

Quizplus · Accepted Answer

- Security I was purchased for $200,000 and had a fair value of $180,000 at December 31, 2014. Therefore, the unrealized loss on this security was $20,000 ($200,000 - $180,000).
- Security J was purchased for $600,000 and had a fair value of $640,000 at December 31, 2014. Therefore, the unrealized gain on this security was $40,000 ($640,000 - $600,000).
- Since Steinway reclassified Security I from available-for-sale to trading, it has to be adjusted to its fair value at the time of the reclassification. At the time of reclassification (December 31, 2014), the fair value of Security I was $150,000. Therefore, it incurred a loss of $50,000 ($200,000 - $150,000) due to the reclassification.
- From the information given in the question, we know that Steinway did not sell any securities during the year. Therefore, there is no realized gain or loss to consider.
- The total loss that should be included in Steinway's income statement for the year ended December 31, 2014 is the sum of the unrealized loss on Security I and the loss due to reclassification of Security I, which is $20,000 + $50,000 = $70,000. However, since unrealized gains and losses on available-for-sale securities are recognized directly in other comprehensive income, only the loss due to reclassification of Security I (which is $50,000) should be included in Steinway's income statement for the year ended December 31, 2014. Therefore, the correct answer is B.

On August 31,2014,Steinway Company Purchased the Following Available-For-Sale Securities