1st key point:-

Any unrealized loss/gain on "available-for-sale" securities goes to "other comprehensive income", not income statement.

2nd key point:-

All permanent differences (other-than-temporary), i.e., decline in FV for available-for-sale securities go to "income statement" as realized losses and the security is written down to the new cost.

Thus, in the above question, let us apply both key points :-

I. Excess of cost of Knox stock over its market value

the loss is permanent and thus, treated as realized loss and accounted in income statement

II.Excess of cost of Scot stock over its market value

loss is temporary. Thus, no IS effect. would be accounted in OCI.