Available for sale accounting

Someone purchases two securities, A & B and holds them for two years. The invesmtent value at time of purchase and in the two subsequent periods are below: Security Cost T=1 T=2 A $950 $850 $900 B $250 $180 $350 Suppose the investments are sold at time T=3, A for $975 and B fo $275. At T=3, there will most likely be a: A) $75 unrealized gain for A shares B) $75 unrealized loss for B shares c) $50 realized gain and a $25 unrealized gain for A shares d) $100 unrealized loss and a $25 realized gain for B shares

I’m going with C because there should be a realized gain of $50.

aaah…i remember this…it’s from the schweser text…one of the concept checkers right… not in a position to work it right now though…

I think its C

i think it’s d.

b profits are 275-250=25 realized recorded at 350 because market at market - versus cost at 250 =100 unrealized loss

^ recording them at 350 vs a cost of 250 is a gain not loss. i honestly don’t like any of those answers.

When your calculating the realized G/L you compare it to the book value, not the market value. Realized G/L = (sale price - book value) However, I’m with banny I don’t like any of the answers but I would go with C because there should be a $50 realized gain

bannisja, i don’t like any answer options either.

MVA = 900 - 950 = -50 MVA = 350 - 250 = 100 change(MVA) = 0 – 50 = 50 change(MVA) = 0 -+ 100 = -100 D? EDIT: Wait, I have messed this up completely… ignore this… I need to review FSA

The answer is D. I was fooled by C because the wording on D was confusing. I read it as an unrealized total loss on A & B but it’s the unrealized loss on B only. The loss is going from $100 to MV of 0 in t=3.

I gotta review my FSA…

Could someone expand on explaining the answer?

the bottom line is that when you sell something you create realised gain and anything that was recorded prior as a unrealized gain or loss needs to be reversed.

so then there should be unrealized gain of $50 and realized gain of $75 for A?

for A realized is 975-950=25 now remember that previously we have recorded unrealized loss of 50 (900-950) so at sale that would become an unrealized gain of 50 that’s what I think the issue is that overall when you sell something you can’t have any unrealized profit - since you sold it - that means that if you recorded previouly an unrealised gain you need to have at sale an urealized loss in the same amount. at sale all the profit you are allowed to have for the holding period is realised

No, the realized gain is the gain that you book (sale price - purchase price). = 25 on both of them. With that you could have answered the question by narrowing it down to the only answer with a $25 realized gain. The unrealized g/l is always based on the change in MVA from year to year. MVA= (Market Price - Cost). The MVA for security B was +100 at the end of year 2. By default, because you sell of the security, it goes directly to 0. Market price of nothing minus the cost of nothing = 0, makes sense. Therefore, the change from +100 (350-250 in year 2) to 0 is -100 (unrealized loss).

That sounds right. Thanks BLOU23.