Question

A newly formed company purchases investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. The financial statements at the end of the year would show which of the following?

A. No loss on the income statement Available-for-sale investments of $11,000 and an unrealized loss of $2,000 in stockholders' equity on the balance sheet
B. No loss on the income statement Available-for-sale investments of $13,000 on the balance sheet
C. Income Statement loss of $2,000 Available-for-sale investments of $13,000 on the balance sheet
D. Loss of $2,000 on the income statement Temporary investments of $11,000 on the balance sheet

Answer 1

Answer: A. No loss on the income statement Available-for-sale investments of $11,000 and an unrealized loss of $2,000 in stockholders' equity on the balance sheet.

Step-by-step explanation:

Available-For-Sale (AFS) securities are not to have their gains or losses reflected in the income statement. They are to be reflected in the Other Comprehensive Income (OCI) section of the Stockholders Equity.

If there is a loss, the AFS security is written down by the loss amount which is then transferred to the OCI section of equity as an unrealized loss. It will reduce the OCI which would reduce the stockholders equity.

In this case therefore, AFS would go to $11,000 and OCI would record an unrealized loss of $2,000.