[livealittle]

my question is how am I supposed to know this company has a 6/30 year end?

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. $160,000

b. $85,000

c. $45,000

d. $120,000

I chose b $85,000. I thought it was FV at 12/31/Y1 $575,000. FV at 12/31/Y2 $490,000. Difference of $85,000. Instead the answer says c. $45,000. per the below explanation. What am I missing here?

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

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[livealittle]

oh, this is Becker MCQ.

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Anonymous]

My theory: the 6/30 vs 12/31 valuation date doesn't have anything to do with when the fiscal year end is, but rather the date the decision is made. The key is this sentence: “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.” Since they made the determination on 6/30, the revaluation was done on 6/30, so as long as their fiscal year end was anytime between 6/30 and 12/31, the answer would be the same. However, if their fiscal year end was 3/31 that would have been a problem, so really the MCQ should have told you the fiscal year end.

[Missy]

6/30 isnt the fiscal year end, its the date the decision was made to transfer the classification. The explanation given is the 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.”

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Omar]

in 30/6 recognize a “loss from investments” between $575,000 and $530,000 in the income statement which will appear in 31/12 I/S
in 31/12 recognize an “unrealized loss” between $530,000 and $490,000

FAR: 73, 85
BEC: 79
REG: TBA
AUD: TBA

[livealittle]

I had left to go to my test and decided to check for responses on my cell phone when I got there.
I think the reclassification sends it to the income statement for the year – year 1 and the other drop in FV sits in unrealized AOCI.

so my test was ok. I feel pretty good about it. But we all know how that goes,

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Author]

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