CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

When an available-for-sale equity security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's
A. book value.
B. cost
C. fair value.
Explanation: The book value is its fair value at the end of last reporting period. The gains/losses are sales price - historical cost, which is also the accumulated gain/loss previously recognized in other comprehensive income + (sales price - book value).

User Contributed Comments 7

User Comment
danlan2 When it's sold, it should use cost as trading security. For held to maturity security, we should use book value,
ThePessimist Except the question asks about an equity security, so it can't be held to maturity.
alai2008 Please help. If the security is available for sale it is recorded at fair value, so when it is sold dont we are supposed to use this recorded fair value?
dblueroom I think this has to do with the fact you already accounted for the accumulated unrealized gain and loss in comprehensive income (equity account), thus we need (fair value - cost) adjusted by this comprehensive income. Anyone agree?
vi2009 check out curriculum e.g. 1 p14. . Available for sale gains / losses should be market price - book value, or transfer OCI and add to OCI the difference between current market price and prior period value. So:

When unsold: differences between the fair value and amortized cost are reported as unrealized holding gains and losses as a separate component (comprehensive income) in shareholder equity. The income is not included in the income statement yet.

When sold: Income includes realized gains or losses (sales price - amortized book value). The income is included in the income statement now, and the unrealized gains/losses are then reversed.
broadex vi 2009 is right. The unrealised gains/losses are accumulated in comprensive statement. Say yr1 cost was 100, yr2 fair value is 120, yr 3 sale at 150.
One way: at year 3. unrealised gain of 20 plus yr 3 gain of 30 makes a total of 50. This 50 is then recorded in P&L.

2nd way: yr3 value less cost = 50 which is recorded in P&L.

Therefore in essence the profit is sale proceeds less cost OR sales proceeds less book value less unrealised gains/losses
Tony1234 Good Question!
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