[Lighthaven]

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. $120,000

b. $85,000

c. $45,000

d. $160,000

Choice “c” is correct, $45,000 loss should be reported in the Year 2 income statement.

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

---

What I don’t understand is why we don’t account for the additional change in FMV at December 31, Year 2 of $490,000. Why is that only the change of FMV in June is taken into account to realize the loss for year 2? Any help would be greatly appreciated!

AUD - 83
REG - 81 (2x)
FAR - 78
BEC - 85

And that's all she wrote.