If Available-for-Sale securities increase in market value by 10, which accounts are affected on the 3 statements?

• A. Income Statement shows a gain
• B. Assets increase by 10 and AOCI increases by 10
• C. Cash increases by 10
• D. Equity decreases by 10

Answer: (B)

Available-for-sale securities are carried at fair value with unrealized gains and losses recorded in Other Comprehensive Income (OCI). When the market value rises by 10, the asset on the balance sheet increases by 10 to reflect the higher fair value, and the corresponding 10 is added to AOCI in equity. The income statement is not affected because the gain is unrealized, and cash does not change unless the security is sold. (If these were trading securities, the gain would go to net income instead of OCI, and if they were held-to-maturity, fair value changes wouldn’t flow through OCI or net income.)