Page 563 - Accounting Principles (A Business Perspective)

14. Stock investments

The sale of an available-for-sale security results in a realized gain or loss and is reported on the income
statement for the period. Any unrealized gain or loss on the balance sheet must be recognized at that time. Assume
the stock discussed above is sold on 2011 January 1, for USD 31,000 (assuming no change in market value from the

previous day) after the company had held the stock for three years. The entries to record this sale are:
2011
Jan. 1 Realized loss on available-for-sale 1,000
securities (-SE)
Unrealized loss on available-for-sale 1,000
securities (+SE)
Cash 31,000
Available-for-sale securities 31,000
The account debited in the first entry shows that the unrealized loss has been realized with the sale of the
security; the amount is reported in the income statement. The second entry writes off the security and records the
cash received and is similar to the entry for the sale of trading securities.
A loss on an individual available-for-sale security that is considered to be "permanent" is recorded as a realized
loss and deducted in determining net income. The entry to record a permanent loss of USD 1,400 reads:

Realized loss on available-for-sale securities 1,400
(-SE)
Available-for-sale securities (-A) 1,400
To record loss in value of available-for-sale
securities.
No part of the USD 1,400 loss is subject to reversal if the market price of the stock recovers. The stock's reduced

value is now its "cost". When this stock is later sold, the sale will be treated in the same manner as trading
securities. The loss or gain has already been recognized on the income statement. Therefore, the entry would simply
record the cash received and write off the security sold for its fair market value. If the market value of the security
has fluctuated since the last time the account had been adjusted (end of the year), then an additional gain or loss
may have to be recorded to account for this fluctuation.

An accounting perspective:

Business insight

On Pearl Harbor Day, 1941 December 7, the stock market fell from 116.60 to 112.52. The average
fell to 92.92 by April 1942. By the end of WWII, the average had risen to 119.40. The average has
risen tremendously since that time, although some time in fits and starts. For instance, in 2007 the
Dow-Jones Industrial Average broke through the 14,000 barrier. The Dow was back below 7,000

in the spring of 2009 and then rose to over 10,000 by the end of that year. Over the last 60 years,
investors have averaged about a 10 per cent to 12 per cent return annually by investing in the stock
market. No one knows what will happen in the future, but many people invest in stocks to try to
stay ahead of inflation. You can visit the DJIA site on the Internet at http://www.dowjones.com to
learn more about the stock market.

The equity method for long-term investments of between 20 per cent and 50 per cent
When a company (the investor) purchases between 20 per cent and 50 per cent of the outstanding stock of
another company (the investee) as a long-term investment, the purchasing company is said to have significant

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