Joined: 13 Apr 2011 Location: United States
Online Status: Offline Posts: 71
Posted: 22 Apr 2011 at 17:09 | IP Logged
Here is a standard trading to AFS - if you reclass mid-year you should stop recognizing unrealized gains. But in the end of year financials wouldn't you reverse out your prior classification of the securities as trading through June, and reclass the unrealized gain/loss to OCI? I guess there is no restate that happens with this reclassification, even if it were a really significant dollar amount?
Question CPA-00277
Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, Year 2, Sun decided to
hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date.
The investments' market value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and
$490,000 at December 31, Year 2.
What amount of loss from investments should Sun report in its Year 2 income statement?
a. $45,000
b. $85,000
c. $120,000
d. $160,000
Explanation
Choice "a" is correct, $45,000 loss should be reported in the Year 2 income statement.
Rule:
When marketable equity securities are transferred between trading and available-for-sale, the transfer is
made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement.
The new carrying amount becomes the basis for any future gain or loss.
Joined: 15 Oct 2009
Online Status: Offline Posts: 100
Posted: 23 Apr 2011 at 00:06 | IP Logged
Reclassification of securties is not a change in accounting principle that requires retroactive treatment. This is a business decision of perference rather than claiming losses in the income statement for trading, the losses can either be charged against retained earnings for AFS or amortized for HTM. To me (I stand to be corrected) it can be likened to a change in estimate.
Joined: 19 Mar 2010 Location: United States
Online Status: Offline Posts: 13
Posted: 25 Apr 2011 at 20:07 | IP Logged
Pretty basic stuff here.Any transfer of a particular security from one group to another is accounted for at fair value. The difference between $575,000 and $530,000 is recogniczed as an Unrealized loss on the current income statement. And the difference between the 530,000 and 490,000 at the end of X2 would be an unrealized loss on OCI. for Available for sell.
Joined: 30 Aug 2012 Location: United States
Online Status: Offline Posts: 2
Posted: 30 Aug 2012 at 14:34 | IP Logged
What's throwing me off is that the Becker text book says
that gains and/or losses from reclassifying Trading
securities to AFS have already been recognized in
earnings so you simply recognize any subsequent G/L in
OCI at year end as you would for any AFS security.
What I think they meant was that you do not transfer any
previous unrealized G/L out of earnings into OCI as that
would require a restatement of last period's Income
Statement.
At the date of the reclassification from Trading to AFS,
recognize any holding gain or loss in earnings. Leave
prior gains or losses alone. Any subsequent gains or
losses go to OCI as the security is now available for
sale.
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Topic: cpa-00277 reclass trading to AFS mid-year
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