Final answer:
The company's income statements for 2014 and 2015 will show a net gain of $2,000 if the investment is categorized as trading securities. If categorized as available-for-sale, the 2014 income statement will not reflect changes, but the 2015 statement will show a gain of $5,000.
Step-by-step explanation:
If a company buys stock in Acme Industries and categorizes the investment as trading securities, the changes in fair value will affect the net income in the income statement. When the fair value drops to $32,000 at year-end, the company will recognize a loss of $3,000 on the 2014 income statement. However, upon selling the stock for $40,000 in 2015, the company will recognize a gain of $5,000. In total, the company will report a net gain of $2,000 ($5,000 - $3,000) over the life of the investment (capital gains).
If the stock is categorized as available-for-sale, the unrealized loss of $3,000 on December 31, 2014, will not appear in the income statement but rather in the other comprehensive income section of equity. When the company eventually sells the stock for $40,000 in 2015, it will then recognize a gain of $5,000 in the income statement for the year.