Question

My real question for the question below is that why in journal entry we only record the unrealized loss once which is(425124-1246-421900=1978)? I thought I still need to record the unrealized loss for the time it is sold which is (421000 - 421900= -900), then do the reclassification entry then the final journal entry for sale?

I am confusing when I should do the reclassification entry. Suppose period one is the fair value on December and period two is the fair value sold on January on next year, do we only do the reclassification if period two has a realized gain?

Mills Corporation acquired as a long-term investment $400,000 of 7% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $425,124 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $421,900. Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $421,000

prepare the Journal entries associated with an available for sale investment

1.

Investment	400,000
Premium	25,124
cash		425,124

2.

Cash	14000
premium		1246
interest income		12754

3.

Unrealized Loss	1977
investment		1977

4.

cash	421000
realized loss	2877
premium		23877
investment		398023
unrealized loss		1977

Answer 1

Statement showing Journal entries of the transactions of mills Corporations (millions)

1st July	Investment in 7% Bond A/c Dr	$425124
2018	To Cash A/c		$425124
	( Being 7 % Bonds Purchased on premium with face value of $ 400000 )
31 Dec	Cash A/c Dr (400000 * 7% * 6months/12 months )	$ 14000
2018	To interest Revenue A/c  [425124*0.06*6/12]		$12754
	To Investment in 7% bonds		$1246
	( Being semi Annual Interest Received and premium amortized)

31 Dec	Unrealised loss Reserve A/c Dr ( 425124- 421900-1246)	$1978
2018	To Investment in 7% Bonds A/c		$1978
	( Being bonds revalued at new market price)
2 jan	Cash A/c Dr	$421000
2019	Loss on sale of Bonds A/c	$900
	To Investment in 7% Bonds A/c		$421900
	( Being Bond sold for the loss of $ 900)

we have recorded unrealised loss only once because unrealized loss occurs when a stock decreases after an investor buys it, but has yet to sell it. in that case this loss is loss which will be actually realised only once we sell the investments till the time we dont sell the investments its which not be actuall loss and while selling the bonds we have not treated that loss as unrealised as while selling we have actually booked the loss by recieving the amount less with $900 as this actual loss which we have suffered

No we dont do reclassification entry if  period two has a realized gain as its has the same effect as we have booked the loss in books we will booking actual gain while selling the investments .

Unrealized gains or unrealized losses are shown and t eated in the Profit  statement and impact the net income of the Company, as securities have not been sold to realize the gains The gains increase the net income and therfore increase in EPS I.E EARNING PER SHARE and retained earnings.

As this treatment provides the results to  company fianancal statement as per IFRS have laid them