Question

Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2012, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2012. Goofy reclassified this investment as trading securities in December of 2013 when the market value had risen to $125,000. What effect on 2013 income should be reported by Goofy for the Crazy Co. shares

Answer 1

Goofy Inc. would report a $7,000 gain on its 2013 income statement due to the reclassification of the Crazy Co. shares from available-for-sale to trading securities, reflecting the increase in market value.

Step-by-step explanation:

The student's question involves the accounting treatment for securities and how it affects income when a company reclassifies its investments. In 2012, Goofy Inc. purchased shares classified as available for sale, which would have been marked to market with changes going to other comprehensive income, rather than the income statement.

When reclassified in 2013 as trading securities, the cumulative gain or loss previously recognized in other comprehensive income must be realized in the income statement. Therefore, in 2013, Goofy would report the unrealized gain from the reclassification of the Crazy Co. shares, reflecting the increase in market value from $118,000 to $125,000, which is a $7,000 gain reflected in the company's income.