[jessanqi]

Does this question mean, when sell the securities in year 2 with the same FMV price at the end of year 1, then should change from unrealized loss (OCI) to realized loss (IS)??

Can anyone please help. Thank you!!

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 investment account.
B. The unrealized loss should be credited to the other comprehensive income account.
C. The unrealized loss should be debited to the other comprehensive income account.
D. The unrealized loss should be credited to beginning retained earnings.

Explanation
The correct answer is B. When you have an unrealized loss on available for sale securities, unless you use the fair value option, the unrealized loss for year 1 goes to other comprehensive income (OCI) as a reduction on the statement of OCI. Then at the end of year 1, the unrealized loss is transferred to the stockholders equity section of the balance sheet to arrive at the accumulated OCI.

In year 2, these available for sale securities were sold at a loss equal to the unrealized loss during year 1. They treated the unrealized loss as though it was closed out to the income statement in year 1instead of being shown in the statement of OCI at the end of year 1. At the end of year 1, the OCI is understated because the loss was closed out to the income statement instead of being shown in the statement of OCI. The understatement of OCI is closed out to accumulated OCI in the stockholders equity section of the balance sheet. Therefore, the accumulated OCI is also understated in the balance sheet. The normal balance of accumulated OCI is a credit balance. To correct the understatement in accumulated OCI in the balance sheet, we must increase accumulated OCI in year 2 by crediting OCI in year 2.

[CoachEmUp]

Yep, you are correct. The question is basically testing whether you know or not to take the loss out of OCI (by crediting the unrealized loss) and taking it to the income statement as a loss.

[jessanqi]

Thank you so much for the confirm!

[Author]

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