[tgrimaldi]

On January 2, Year 1, Adam Co. purchased as a long-term investment 10,000 shares of Mill Corp.’s common stock for $40 a share. These securities were properly classified as available-for-sale. On December 31, Year 1, the market price of Mill’s stock was $35 a share, reflecting a temporary decline in market price. On January 28, Year 2, Adam sold 8,000 shares of Mill stock for $30 a share. For the year ended December 31, Year 2, Adam should report a realized loss on disposal of a long-term investment of

A $40,000

B $100,000

C $60,000

D 80,000

I answered B using the following JEs

AFS Security 400,000

Cash 400,000

Revalue to FMV @ YE-

Unrealized Loss – OCI 50,000

Valuation Acct- AFS 50,000

Sale-

280,000-240,000 = 40,000

Why do we not treat the 8,000 shares sold at $35?

[excel monkey]

The correct answer should be D: 80,000

Your first two journal entries are spot on. The journal entry on the date of sale would be:

Dr. Cash 240,000 (8,000 shares * $30)

Dr. Valuation Acct – AFS 40,000 (50,000*.80)

Dr. Loss on Sale of Security 80,000 (320,000-240000)

Cr. AFS Security 320,000 (8,000*$40)

Cr. Unrealized Loss – OCI 40,000 (50,000*.80)

When the AFS was marked to market, the loss was parked in Other Comprehensive Income (it didn't hit the Income Statement). When the 8,000 shares were sold, 80% of the unrealized loss (8,000/10,000) shifted from OCI to the I/S, along with the 40,000 loss from the drop in price from $35 to $30.

FAR - 91
AUD - 88
BEC - 86
REG - 79

[Author]

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