Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date. The investments' market value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2.
What amount of loss from investments should Sun report in its Year 2 income statement?
a. $85,000
b. $160,000
c. $45,000
d. $120,000
Explanation
Choice "c" is correct, $45,000 loss should be reported in the Year 2 income statement.
Rule: When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss.
Original cost $ 650,000
Unrealized I/S loss for Year 1 (75,000)
FMV at 12/31/Year 1 575,000
FMV at 6/30/Year 2 (530,000)
Unrealized loss in Year 2 I/S $ 45,000
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