In year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?
a. The unrealized loss should be credited to the other comprehensive income account.
b. The unrealized loss should be credited to beginning retained earnings.
c. The unrealized loss should be credited to the investment account.
d. The unrealized loss should be debited to the other comprehensive income account.
Explanation
Choice "a" is correct. In year 1, the company would have debited an unrealized holding loss within other comprehensive income (the U in PUFER) and they would have credited either the investment account itself or more likely a valuation allowance associated with this asset account. In Year 2 when these securities were sold for the exact same loss, the company would need to eliminate this unrealized loss from OCI by crediting it and record a realized loss on the income statement by debiting it.
Choice "c" is incorrect. The investment account would need to be credited at the time of the sale for the carrying value of the investment.
Choice "d" is incorrect. The unrealized loss was debited in Year 1 when the unrealized loss was initially recorded, so a credit is needed to eliminate it.
Choice "b" is incorrect. The unrealized loss would not affect retained earnings, although the realized loss certainly would.
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