Question

On December 29, 2022, James Company sold a debt security that had been purchased on January 4, 2021. James owned no other debt securities. An unrealized holding loss was reported in the 2021 income statement. A realized gain was reported in the 2022 income statement. Was the debt security classified as available-for-sale and did its 2021 market price decline exceed its 2022 market price recovery?
2021 Market Price
Decline Exceeded 2022
Available-for-Sale Market Price Recovery
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer 1

Answer:

d. No No

Explanation:

The information given tells us that during 2021, the market value of the security decreased, and during 2022, the market value increased. It doesn't tell us the amount of the loss or the gain, so we cannot know for sure if the price's decline or recovery was higher.

Any increase or decrease in the market value of securities classified as available-for-sale (AFS) will result in unrealized gains/losses that must be reported in the balance sheet, not the income statement.