Question

How should unrealized holding losses on available-for-sale securities be reported?

1) As a separate line item in the income statement
2) As a deduction from the carrying amount of the investment
3) As a reduction in the equity section of the balance sheet
4) As a footnote disclosure in the financial statements

Answer 1

Unrealized holding losses on available-for-sale securities are reported in the equity section of the balance sheet as a part of accumulated other comprehensive income, not on the income statement.

Step-by-step explanation:

Unrealized holding losses on available-for-sale securities should be reported as a reduction in the equity section of the balance sheet. These losses are recognized in other comprehensive income (OCI) rather than the income statement, as they represent potential losses on investments that the company has not yet realized through sale. Instead of affecting net income, they are included in the accumulated other comprehensive income (AOCI), which is a component of shareholders' equity. The losses will affect net income only if and when the securities are actually sold at a loss.