Question: Assume that Valente has chosen not to report the above available-for-sale investment in the same
manner as a trading security but rather by means of the traditional approach. Thus, the $3,000 unrealized gain
created by the appreciation of value is reported within stockholders’ equity at the end of Year One. Subsequently,
in Year Two, these shares are sold on the stock exchange for $27,000. What reporting is made at that time?
How is the eventual sale of investments that are classified as available-for-sale securities reported?
Answer: When available-for-sale securities are sold, the difference between the original cost ($25,000) and the
selling price ($27,000) is reported as a realized gain (or loss) on the income statement. Because no change in net
income was reported in the previous year, this entire amount has to be reported at the date of sale. Having put
the unrealized gain into stockholders’ equity in Year One means that the change in value only touches net income when sold.
However, mechanical complexities now exist. The investment has been adjusted to a $28,000 carrying amount
and a $3,000 unrealized gain is still reported within stockholders’ equity. As a balance sheet account, this $3,000
figure is not closed out at the end of Year One. When the investment is sold, both the $28,000 asset and the
$3,000 unrealized gain must be removed. The net amount mirrors the $25,000 historical cost of these shares.
By eliminating the previous gain in this manner, the asset is brought back to the original $25,000. Thus, the
appropriate realized gain of $2,000 is recognized: the shares were bought for $25,000 and sold for $27,000.
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