Unrealized losses are reported in a similar manner. Unrealized gains and losses are
reported as other comprehensive income items until the related securities are sold.
When temporary securities are sold, the unrealized gains or losses become realized
and are included in determining net income.Long-Term Investments in Stocks
Long-term investments in stocks are not intended as a source of cash in the normal op-
erations of the business. Rather, such investments are often held for their income, long-
term gain potential, or influence over another business entity. They are reported in the
balance sheet under the caption Investments, which usually follows the Current Assets
section.
When the investor does not have a significant influence over the investee, the in-
vestment is treated as an available-for-sale security as illustrated in the preceding sec-
tion for short-term available-for-sale securities. Thus, the investment is recorded at cost
and reported at fair market value net of any applicable income tax effects. In addition,
any unrealized gains and losses are reported as part of the comprehensive income.^11
For example, Delta Air Linesdisclosed investments in Priceline.compreferred stock
as a noncurrent investment at the appraised fair market value.
In some cases, however, the investor (the buyer of the stock) has significant influ-
ence over the operating and financing activities of the investee (company whose stock
is owned). In this case, the equity methodis used to account for the investment.546 Chapter 12 Special Income and Investment Reporting Issues
11 An exception to reporting unrealized gains and losses as part of comprehensive income is made if the
decrease in the market value for a stock is considered permanent. In this case, the cost of the individual
stock is written down (decreased), and the amount of the write-down is included in net income.Exhibit 3
Temporary Investments
on the Balance SheetExhibit 4
Statement of
Comprehensive IncomeAssets
Current assets:
Cash $119,500
Temporary investments in marketable
securities at cost $690,000
Unrealized gain (net of applicable income
tax of $18,000) 42,000 732,000Stockholders’ Equity
Accumulated other comprehensive income 42,000Crabtree Co.
Balance Sheet (selected items)
December 31, 2007Net income $720,000
Other comprehensive income:
Unrealized gain on temporary investments in marketable
securities (net of applicable income tax of $18,000) 42,000
Comprehensive income $762,000Crabtree Co.
Statement of Comprehensive Income
For the Year Ended December 31, 2007