When the fair value of a company's portfolio of available-for-sale equity securities is lower than its book value, how should the difference be handled?
A) Written off as an impairment
B) Recorded as a liability on the company's balance sheet
C) Recorded as an expense on the company's income statement
D) Deducted from the investment account
E) Added to stockholders' equity of the investor

Question

Quizplus · Accepted Answer

Available-for-sale securities are accounted for on a fair value basis. A decrease in fair value results in a reduction of the investment account and a reduction of stockholders' equity (through other comprehensive income/loss). Gains and losses on available-for-sale securities are not recorded on the income statement unless they are realized. A loss of fair value results in a reduction of stockholders' equity rather than an addition to it.

When the Fair Value of a Company's Portfolio of Available-For-Sale