Final answer:
When reclassifying an investment from available-for-sale securities to trading securities, record it at the fair market value on the date of reclassification. Changes in value will affect earnings immediately upon reclassification.
Step-by-step explanation:
If an investment in stock is reclassified from available-for-sale securities to trading securities, it should be recorded on the date of reclassification at its fair market value. This is because trading securities are meant to be sold in the short term and are thus reported at fair value, with any unrealized gains or losses recognized in earnings immediately. In comparison, available-for-sale securities are recorded at fair value, but changes in value are generally reported in other comprehensive income and do not affect earnings until they are sold or result in a credit loss.
For example, if an investor initially bought a share of stock in Wal-Mart for $45 and it is valued at $60 at the time of reclassification, the stock would be recorded at $60. This new valuation would reflect any capital gain that has not yet been realized through a sale. Upon reclassification, the $15 increase in value from the original purchase price to the current market price would be recognized accordingly.