On January 10， Year 1， Box， Inc. purchased marketable equity securities of Knox， Inc. and Scot， Inc. Box classified both securities as available-for-sale assets over which it could not exercise significant influence. At December 31， Year 1， the cost of each investment was greater than its fair market value. The loss on the Knox investment was considered permanent and that on Scot was considered temporary. How should Box report the effects of these investing activities in its Year 1 income statement？
I. Excess of cost of Knox stock over its market value.
II. Excess of cost of Scot stock over its market value.
a. No income statement effect.
b. A realized loss equal to I only.
c. An unrealized loss equal to I only.
d. An unrealized loss equal to I plus II.
Explanation
Rule： “Available-for-sale equity” securities are carried at fair value. Permanent impairment in value results in a writedown and a charge to income as if the loss was realized.
Choice “b” is correct. Record a realized loss on the Knox stock because the loss is considered permanent.
Choices “d” and “c” are incorrect. The loss on Knox is permanent and therefore a realized loss. The loss on Scot is not permanent and should not be reported on the income statement.
Choice “a” is incorrect. Realized losses are reflected in current year income.
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