Question

Hawk Corporation purchased 1,000 Diamond Corporation bonds in 2015 for $500 per bond and classified the investment as securities available for sale. The value of the Diamond investment was $600 per bond on December 31, 2016, and $650 on December 31, 2017. During 2018, Hawk sold all of its Diamond investment at $700 per bond.

Hawk records unrealized holding gains and losses up to the moment of sale, what should be the amount of reclassification adjustment that Hawk would record upon sale?

A) A debit of $50,000

B) A debit of $150,000

C) A debit of $200,000

D) A credit of $150,000

Answer 1

Option C debit of $200000
In 2015 price is	$500
2016	$600
2017	$650
2018	$700
At end of 2016 the entry is	DR	Cr
Fair value adjustment	$100,000
Unrealized holding gains (1000 shares *(600-500)		100000
In 2018 at the time of sale the value is $700 reclassification adjusmnet will be
Reclassification (700-500)*1000	200000
Fair value adjustment		200000
hence a debit of $200000 is required