The following information is available for an enterprise's security investments as of December 31,2014:

-In June 2015,the enterprise decided to reclassify the Mingo stock as trading securities.The stock had a market value of $41,000 at the time of the reclassification. What amount of holding gain or loss is immediately recognized in 2015 earnings?

Question

The following information is available for an enterprise's security investments as of December 31,2014:
 
-In June 2015,the enterprise decided to reclassify the Mingo stock as trading securities.The stock had a market value of $41,000 at the time of the reclassification. What amount of holding gain or loss is immediately recognized in 2015 earnings?

Quizplus · Accepted Answer

The Mingo stock was previously classified as available-for-sale, which means that unrealized holding gains and losses are reported as other comprehensive income (OCI) and are not immediately recognized in earnings. However, when the stock is reclassified as trading securities, any previous unrealized holding gains or losses in OCI are immediately reclassified to earnings.

Based on the given information, the Mingo stock had a cost basis of $40,000 and a fair value of $41,000 at the time of reclassification. This means that there was a previously unrealized holding gain of $1,000 in OCI, which is now recognized in earnings.

Since this is a gain, it will increase earnings. Therefore, the answer is D) $1,000 loss (which is a gain when recognized in earnings).

The Following Information Is Available for an Enterprise's Security Investments