1. Identify the types of investments classified as available-for-sale.
2. Record the receipt of dividends from an investment that is viewed as available-for-sale.
3. Explain the handling of changes in the fair value of investments in available-for-sale securities.
4. Calculate the gain or loss to be reported when available-for-sale securities are eventually sold.
5. Understand the need for reporting comprehensive income as well as net income.
6. Explain the adjustment of net income utilized to arrive at comprehensive income.
Question: Not all investments in stock are bought for a quick sale. Assume Valente Corporation buys one thousand
shares of Bayless Corporation for $25 in Year One but does not anticipate selling the investment in the near
term. Company officials intend to hold these shares for the foreseeable future until the money is clearly needed.
Although the stock could be sold at any time, the president of Valente believes this investment might well be
retained for years. During Year One, a $200 cash dividend is received from the Bayless shares. At the end of that
period, the stock is selling for $28 per share. How does the decision to hold equity shares for an extended period
of time impact the financial reporting process?
Answer: Because Valente’s intention is to retain these shares for an indefinite period, they will be classified on the
company’s balance sheet as an investment in available-for-sale securities rather than as trading securities. Despite
the difference in the plan for these shares, they are—once again—recorded at historical cost when acquired.