Question

Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and classified the investment as securities available for sale. The value of these holdings was $400 per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of its Witt bonds at $350 per share. If Dim records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Dim would record upon sale? O A credit of $450,000. O A debit of $500,000. O A debit of $450,000. O A credit of $500,000.

Answer 1

As per the accounting standard the securities are recorded in books two ways either as held to maturity , available for sale,

In this case securities are available for sale and these types of securities are reported at fair value and  unrealized gain and loss per accounting year in balance sheet under section other comprehensive income or loss  of securities

in year 2016

Unrealized Holding Gain or loss -Equity 400000 (400*1000) --- loss

To Fair value adjustment A/c 400000 (400*1000)

( being unrealized loss of bonds @ 400 per bond recorded )

In year 2017

Unrealized Holding Gain or loss -Equity 100000 (100*1000) --loss

To Fair value adjustment A/c 100000 (100*1000)

( being unrealized loss of bonds @ 100 per bond recorded )

In year 2018

Fair value adjustment A/c dr 50000( 50*1000)

To unrealized Holding Gain or loss - equity 50000(50 *1000) - gain

( being gain on fail value of bond recorded as unrealized gain)

so we see unrealized gain or  loss account has 450000 debit balance

answer 450000 dr balance