This is for anyone who wanted some more information on this problem: This question stirs up an interesting issue with SFAS 109 (Accounting for Income Taxes) and SFAS 115 (Accounting for Certain Investments in Debt and Equity Securities) that is not dealt with in the reading. SFAS 109 talk about establishing deferred tax assets or liabilities. SFAS 115 talks about how to account for unrealized holding gains/losses associated with available-for-sale securities. It turns out that these unrealized holding gains/losses are temporary differences, i.e., it is subject to SFAS 109. In particular, the company would need to establish deferred tax assets or deferred tax liabilities that are included in the equity section. Furthermore, depending on the likelihood of realizing these deferred tax assets, an allowance may need to be established against the deferred tax assets. Notice that these tax assets, unlike those related to net income, must be kept within the shareholders’ equity section.