How to Record the Gain on a Sale to Equity
A gain on a sale of equity securities occurs when you sell the securities for a higher price than their original cost. The gain on the sale is disclosed on the income statement as an addition to income from continuing operations. If unrealized gains or losses were recorded in accumulated other comprehensive income (equity account) on the balance sheet during the time the security was held, these amounts must be reversed at the time of sale.
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Instructions
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Record a journal entry for the sale of the equity security. Debit cash for the number of shares sold multiplied by the stock’s selling price, and credit the equity security investment account for the original cost of the shares sold. Credit a realized gain on the equity security account for the difference between the equity shares’ original cost and their selling price.
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Reverse any unrealized holding gains or losses on the security posted to the accumulated other comprehensive income account in the equity section of the balance sheet. Unrealized gains or losses are posted to other comprehensive income to comply with U.S. accounting guidelines that require that these securities be adjusted to their fair value at the end of an accounting period. Debit unrealized gains and credit unrealized losses to remove them from the equity section; a corresponding debit or credit is posted to the valuation account used to adjust the equity security investment account to fair value.
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Report the gain on the income statement. The realized gain from the sale of the equity security is posted to the income statement under the section “Income from Continuing Operations.”
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References
- “Financial: CPA Exam Review”; DeVry/Becker Educational Development Corp.; 2009
- CliffsNotes: Accounting for Equity Securities
