I have a question on this:
Sun had investments in marketable debt securities costing $650,000 that were classified as available-for sale. On June 30, 20X3, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ market value was $575,000 at December 31, 20X2, $530,000 at June 30, 20X3, and $490,000 at December 31, 20X3. Sun does not elect the fair value option to account for these investments.
What amount should Sun report as net unrealized loss on marketable debt securities in its 20X3 statement of stockholders’ equity?
A. 45,000
B. 40,000
C. 160,000
D. 120,000
Answer D. When an investment in a debt security is reclassified from available for sale (AFS) to held to maturity (HTM), the transfer occurs at its market value on the date of transfer. Any unrealized holding gain or loss is recognized in other comprehensive income (OCI) and amortized as an adjustment to the effective interest rate on the HTM security. On the date of transfer, the market value of $530,000 is $120,000 lower than its $650,000 cost, which is recognized in OCI, but no portion is recognized in income.
My question is do we always reclassify from cost to current FMV to determine G/L. I was under the impression we used the difference between FV’s to determine G/L, or is that only when determining the unrealized g/l on the investment? That is to say:
Purchase: 650 AFS
MV Dec 31, X2 AFS: 575
MV June 30, X3 Reclass to HTM: 530
Why are we not reporting the difference between the 575 and the 530 as the loss in the reclass, but rather the 650 from the 530?
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