Question

When an available-for-sale equity security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's:

A) Historical cost

B) Fair value at the date of sale

C) Fair value at the date of purchase

D) Book value

Answer 1

The gain (loss) on sale of an available-for-sale equity security is based on its fair value at the date of purchase.

Step-by-step explanation:

When an available-for-sale equity security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's fair value at the date of purchase. This means that the gain or loss is based on the value of the security when it was acquired, not its historical cost or book value. Fair value is the current market value of the security, which could have changed since its purchase. Therefore, option C) Fair value at the date of purchase is the correct answer.