- CFA Exams
- CFA Level I Exam
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 13. Intercorporate Investments
- Subject 2. Investments in Financial Assets
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.
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
|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